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

Good day, and thank you for standing by. Welcome to Property For Industry Limited FP 2024 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, Chief Executive Officer, Simon Woodhams. Please go ahead.

Thank you. Good morning, and welcome to the Property For Industry's FP24 annual results briefing. Simon Woodhams speaking, I'm the CEO of PFI. And on the line with me today is Craig Peirce, our Chief Finance and Operating Officer. Now before we get to the results, I just wanted to point out that we are presenting results for the 6 months ended 30 June 2024 referred to as the FP24 results. Throughout this presentation, the unaudited interim 6 months results from 1 January to 30 June 2023 are presented as the prior comparable period, or PCP, unless otherwise stated. This difference to the accompanying annual report. So let's get on to it. This morning, Craig and I will speak to the topics outlined here. I will begin by reviewing the highlights for the year and give an overview of the portfolio and its performance along with a summary of the key leasing transactions throughout the period. Craig is then going to take you 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 before reviewing our priorities and then close the presentation, after which there will be an opportunity for participants [ to the call ] to ask any questions they may have. So if you turn to Slide 5 of the presentation headed highlights. We're very pleased to report on what has been a productive 6 months for us here at PFI. Highlights include the valuation of our $2.1 billion industrial property portfolio stabilized and is now 16% under-rented. Core assets have delivered annualized rental growth of 5.7% across the $36.3 million of contract rent that was reviewed during the period. $9.5 million of stabilized contract rent was leased during the year with rents agreed on $5.9 million of contract rent at an average of 25.3% above previous contract rents. The remaining portion is subject to market reviews on renewal date with those leases approximately 17% under-rented, as at 30 June. Our Green Star development pipeline has been advanced with tenant's commitment secured for Stage 2 of the redevelopment of 78 Springs Road. Our active brownfield sites being 30 to 32 Bowden Road and Stage 1 of 78 Springs Road are set to be delivered on time and within budget with approximately $33 million of committed spend remaining. We now estimate that we have the opportunity to deploy a further $350 million on Green Star development over the medium term. Our balance sheet also remains in great shape. We've established or refinanced $600 million of facility since December 2023, leaving us with almost $300 million of available liquidity. Gearing remains well within our target range of 32.9%, and the interest rate environment is forecast to materially improve. This activity is combined to deliver a stable annual result for FP24 with our adjusted funds from operations or AFFO in line with the prior period at $0.0458 per share. And finally, today, we have announced the second quarter a final cash dividend of $0.022 per share resulting in cash dividends for the period of $0.0415 per share, consistent with our FY '23 dividends on an annualized basis. If you now turn to Slide 7, headed portfolio snapshot. Our portfolio has continued to benefit from strong re-leasing outcomes and structured rental growth. Here, we have a summary of the statistics as at 30 June, including the impact of brownfield leases yet to commence. You can see that the company owns a portfolio of 91 properties, which are leased to 126 tenants. The portfolio was 98.6% occupied with $99.7 million of contract rent growing the $106.9 million once new leases commence at our brownfield development sites. PFI's weighted average lease term is 5.07 years, moving to 6.04 years upon the inclusion of these brownfield leases. Turning to Slide 8. During the financial period, the team completed 20 leases on over 80,000 square meters of area or 11.6% of the portfolio by rent for an average lease term of 6.2 years. Of those 20 leases, 75% were renewals and the remainder were new leases. On average, just 0.1 month of incentive per year of term was required to secure these transactions, reflecting the continued strength of the industrial market. Of the $11.6 million of contract rent secured during the year, $2.1 million of contract rent related to newly acquired or developed property. Rents were agreed on $5.9 million of contract rent, and these transactions were settled 25.3% above previous contract rents. The remaining $3.6 million of contract rent secured is subject to market reviews on renewal. After effecting [ in ] review caps, those leases are approximately 17% under-rented at the end of the period and have a weighted average review date of December 2025. Moving on to Slide 9, as I mentioned earlier, the portfolio is 98.6% occupied, and as the graph on the left-hand side illustrates, excluding brownfield opportunities, we have just 1.6% of contract rent due to expire during FY '25. The largest single expiry in FY '25 is 0.4% of contract rent, meaning there's very little income risk in the next 12 months. Works are currently underway to replace the warehouse floor slab and refurbish the office space on the vacant building at 212C Cavendish Drive with that property making up 1.3% of contract rent. You can turn to Slide 10, 63 rent reviews were completed during the financial period, resulting in an average uplift of 8.3% or 5.7% annualized on $36.3 million of contract rent. Around 85% of our portfolio is subject to some form of lease during 2025 and FY '25 expiries and market reviews account for 16.4% of total contract rent. Those market reviews and expiries are about 24% under-rented at June 2024 after factoring in review caps. Independent rental assessment estimates the PFI portfolio is approximately 16% under-rented while we estimate our Auckland warehouse space, which is about $49 million of contract rent to be around 23% under-rented. This provides PFI a platform for further rental growth. Moving to Slide 11, during the 6 months to 30 June, we recorded a decrease in value from independent valuations of just $4.2 million or 0.2% to $2.05 billion. Realized rental growth was estimated to have added approximately 7% to the value of the portfolio with the balance of the valuation outcome due to softening in yield or cap rates in response to sustained interest rate pressures. As a result of portfolio and valuation activity and excluding the company's active brownfield development sites, PFI's passing yields softened by 0.13% to 5.14%, while the portfolio market cap rate softened by 0.15% to 5.89%. An independent market rental assessment of the entire portfolio was completed, as part of the valuation process. This assessment estimates the PFI portfolio is around 16% under-rented. Commercial property valuations have come under pressure in recent years, as cap rates have responded to the RBNZ's recent tightening cycle. However, industrial property valuations have fared better than most, evidenced by PFI's $389 million of accumulated fair value gains over the last 5.5 years. Industrial valuations have been supported by record low vacancy here in Auckland and structural tailwinds such as e-commerce. It was accelerated by the COVID-19 pandemic. We believe industrial property valuations are stabilizing, as investors gain confidence. The global interest rate cycle has turned [ supported ] by large underrating debts, structural rental growth and relatively low levels of CapEx. I'm now going to hand things over to Craig, who's going to speak on several topics, including a review of the FP24 results. Craig?

Good morning, everyone, and thanks for tuning in, as we share with you PFI's FP24 annual results. As Simon mentioned, I'm going to dig into the financial results itself. So starting with the headlines, profit after tax of $21.2 million was up $51.7 million in the prior comparable period, incorporating fair value losses on properties of $4.2 million in the current period, as compared to losses of $55 million in the prior period. Funds from operations were up 2.2% to $0.0503 per share and adjusted funds for operations were in line with the prior period. FP24 cash dividends of $0.0415 per share are consistent with the FY '23 dividends on an annualized basis. To dig into those numbers a little bit, let's turn to Slide 13. On this slide, we take a look at net rental income, which at $48.3 million is up $0.9 million or 1.9% on the prior comparable period. As can be seen from the right-hand side of the chart on this slide, growth on the stabilized portion of the portfolio equated to 4.3% over the period. As Simon mentioned earlier, FP24 saw PFI's portfolio continued to deliver strong levels of rental growth, which has translated into that positive contribution to net rental income totaling $3.4 million. But the net impact of other activities such as developments, divestments and vacancy, resulted in a decrease of $2.5 million with the largest negative item to call out here being the loss of income from the company's brownfield development sites. Works were taking place for the full 6 months in the current period, whereas in the prior period, those sites still had some income coming off them. Moving now to Slide 14, on this slide, we can see how the year -- how the periods activity is translated into adjusted funds from operations or AFFO. Under the hood, there are a few moving parts. On the positive side, our effective tax rate reduced off the back of increased deductible CapEx and tax deductions associated with the redevelopment projects, a reduction in non-recoverable property costs and an increase in AFFO adjusted net retinal income were also positives. The main offsetting factors were an increase in maintenance CapEx and an increase in admin expenses due to climate-related disclosures and other compliance costs and a small increase in interest expense and bank fees. If you turn to Slide 15, turning our attention to dividends. The PFI Board has resolved to pay second quarter final dividend of $0.022 per share, with the dividend reinvestment scheme not operating. The second quarter dividend will [ take ] cash dividends for the year to $0.0415 per share, consistent with FY '23 dividends on an angulated basis and resulting in an FFO dividend payout ratio of 83%, and an AFFO dividend payout ratio of 91%. The dividend payout ratio based on PFI dividend policy is 92% of AFFO on a rolling 3-year historic average basis, with FP24 dividends annualized to account for the 6-month period. Looking to the year ahead, very low levels of expiries coupled with a portfolio that is around 16% under-rented, provides a platform for the company to continue to grow rental income. While still challenging, interest rate environment is forecast to improve materially over the next 24 months, but market is currently pricing at around 200 basis points of cuts to the official cash rate over the next [ 2 ] years, with around 40% of PFI's borrowings on floating interest rates, these caps will provide immediate relief to the company's interest bill. Balancing these factors and others, dividend guidance for FY '25 has been set at [ $0.083 to $0.085 ] per share, which is an increase of $0.02 per share or 2.4% on annualized FP24 dividends. Cash dividends at that level are anticipated to result in a dividend payout ratio towards the lower end of PFI's dividend policy range. Turning to Slide 16, looking now at the balance sheet here we provide more detail on the change in value of PFI's investment properties valued at the end of the period at $2.05 billion. The increase in the end of 2023 was largely driven by the deployment of $49.5 million of CapEx, with the vast majority of this being spent on the company's Green Star developments at Bowden and Springs Road. The bolt-on acquisition of 45 Cryers in East Tamaki settled in February '24 also contributed to the increase. These increases were somewhat offset by the divestments of 15 Artillery Place at Nelson and 10c Stonedon Drive in East Tamaki, which settled in March and June of the period, along with a small 0.2% valuation loss, which Simon talked to earlier. Turning now to Slide 17, where we look at NTA. Net tangible assets or NTA per share decreased by [ $0.002 ] or 0.1% to [ $2.707 ] per share or $2.71 at the end of FP24 with a muted NTA per share movement reflective of the stabilization of PFI's investment property valuations. So moving now to Slide 19, where we give an update on capital management. It was a busy period for capital management. During the period, we established a $50 million 7-year facility with CBA, and in turn, we reduced the short-term facility by the same amount. Post balance date, we also did a second draw down on a non-bank facility with Pricoa for $25 million and canceled down another $25 million of shorter-term funding at the same time. That $25 million draw down was for 8.5 years on a float rate basis with the margin [ plus for the ] duration. We also refinanced our syndicated facilities in the shorter-term BNZ facility, converting it into a new $100 million syndicated facility and extended the term on a $125 million term loan with CBA all after balance date. During the period, we settled those divestments I talked about earlier, recycling $29.4 million of proceeds into our Green Star development pipeline. So all of these activities have combined to provide the flexibility to execute on our near-term development pipeline and repay upcoming bond maturities using our existing funding envelope. Moving now to Slide 20, on this slide, the top graph shows the result of all those things I was talking about earlier and the bottom graph illustrates our hedging profile. As can be seen by the bottom graph, interest rate hedging provides for an average of 57% of the company's debt to be hedged at an average fixed rate of 2.74% during FY '25, offering some near-term protection from floating interest rates, which while forecast to come down, but still above our average interest rate. Turning to Slide 21, here, we have a bit more detail on committed gearing following all currently committed acquisitions, divestments and projects and excluding any revaluation impacts of general portfolio CapEx, we currently see gearing lifting to around 35.4%. Add to that, the $40.6 million required to settle our Spedding Road land acquisition and gearing was a touch more than 36.6% by mid-2027, still within PFI's tariff range. We have sufficient capital available within our existing funding envelope for the company's developments and are exploring our funding options for Stage 3 of Springs Road and Spedding Road. We've done it for a while now. So moving to Slide 23 for an update on sustainability. In early 2023, we shared PFI's refresh sustainability strategy with you all. One of our key commitments within this strategy was targeting 5 Green Star ratings to significant new buildings. And we're thrilled to confirm that we've recently been awarded a 5-star -- 5 Green Star design rating for our Bowden Road Stage 1 building, which is leased to Tokyo Food. This is our first industrial Green Star rating, and we're really proud to have achieved this. Meanwhile, our Bowden Road Stage 2 building and 78 Springs Road Stage 1 development remain on track to achieve their ratings in time. Moving to Slide 24, our sustainability strategy also covers our existing portfolio of assets. During 2023, we transitioned to an in-house facilities management model, and this has seen a range of benefits for PFI, including strengthening our relationships with our tenants. Our move to an in-house facilities management model is also mean that we're able to work with our tenants to deliver solar installations at a faster rate than we anticipated, and we've now achieved a target of 5 solar installations by the end of 2025, well ahead of time. We have more in the pipeline. So turning now to Slide 25. The in-house team has also been hard at work installing power metering and monitoring at our properties, with installations now completed at over 50% of our properties, again, well ahead of our targeted completion date for 2025. This is important, as PFI previously had limited visibility of the operational performance of our buildings. For example, how much energy they use, and we will need this information to pursue getting green certifications by our existing buildings in the future. That's all for me for now. I'll hand you back to Simon and be around for questions at the end. Simon?

Thanks, Craig. We're now on Slide 27, and I'm going to touch on the current market conditions. As you can see by this slide, PFI's portfolio delivered significant re-leasing spreads over the last 2 years, as leases reset to market via rent reviews and renewals. This has helped offset the increased borrowing costs Craig was talking about earlier. Looking forward, PFI's large under-renting gap provides an embedded pathway to near- to medium-term rental growth. Despite CBRE forecasting market rental growth to track sideways in the near term, PFI's resilient and well diversified leasing profile has limited vacancy and very low levels of expiries in the next 24 months with the return of more normal levels of expiry through FY '27, FY '28 expected to coincide with increasing rents. If you turn to Slide 28, we'll take a closer look at the interest rate outlook and what it means for industrial property returns. After 15 long months of extremely tight monetary policy, the RBNZ has given the green light to progressively lower interest rates. Not only did it cut the cash rate by 25 basis points to 5.25% at the August MPS, but it also published a rate track, which implied a further 3 25-point cuts by February next year on its way to an eventual low of 3%. Markets have taken this one step further and are now pricing at approximately 75 basis points of cuts [ to ] OCR over the 2 remaining RBNZ policy meetings of 2024 and a cumulative 2% of cuts over the next 2 years. As history has shown interest rates are a key driver of property sector returns with PFI's valuation stabilizing on renewed confidence that the global interest rate cycle has turned, CBRE are predicting Auckland industrial total returns to average approximately 10.4% over the next 4 years, as yields respond to forecast interest rate cuts and under-renting gaps closed. Turning to Slide 30, as most of you on the call today will already now, we look at our portfolio, when we look at our portfolio, we split it into 4 categories or buckets. We do this [ because it gives us ] focus and enables us to act with confidence that the portfolio grows. As you can see, all 4 buckets currently sit within their target ranges. Brownfield opportunities that is the redevelopment of existing holdings have understandably continued to be a huge focus for the team, and these are outlined at a high level on the next slide. Slide 31, approximately $313 million or 15% of our portfolio is classified as brownfield opportunities, and we'll go into a bit more detail on these particular projects in the slides that follow. These redevelopments allow us to invest our capital into projects in key precincts regenerating older assets that we own and the best-in-class Green Star buildings that will underpin our performance for the next 50 years and beyond. Turn to Slide 32, as the footage on this slide illustrates, you can see the development is almost complete at 30 to 32 Bowden Road in the heart of Mount Wellington here in Auckland. The Tokyo Food building has achieved practical completion and a 5 Green Star rating with their lease having commenced at the end of June. We also secured a lease for the remaining 60% of the site, signing a 12-year term with Daikin New Zealand, taking the average lease term of the development to 12 years. This building will also target a 5 Green Star rating and is expected to be completed in October following additional design changes associated with the Daikin lease. Once completed, the 2 buildings were combined to approximately 24,000 square meters of 5 Green Star rated industrial space. Moving on to Slide 33, here, you can see the current master plan for 78 Springs Road in East Tamaki. We are pleased to announce today that MiTek New Zealand Limited, the New Zealand arm of a global manufacturer is committed to a 12-year lease, over 6,500 square meters of warehouse and approximately 2,500 square meters of breezeway, shaded here in blue, underpinning the second stage of the redevelopment of the site. On the next slide, a little bit more detail. Stage 1 of the redevelopment of 78 Springs Road is progressing well with the program of works ahead of schedule and on budget. Completion is now expected in November 2024. As I briefly touched on before, we have signed a design and build agreement to lease with MiTek to develop 6,500 square meters of warehouse that anchor Stage 2 of the redevelopment of the site with the balance approximately 4,800 square meters of warehouse to be developed on a speculative basis. Early works are expected to begin at the start of 2025 with the project expecting to complete in mid-2026. Stage 2 has an incremental cost of approximately $42 million with a targeted yield on cost, including land in excess of 6%. Plans for the balance of the site, Stage 3, allow for approximately 17,500 square meters of warehouse with 500 square meters of office, 4,200 square meters of breezeway and canopies, and 2,000 square meters of yard with any redevelopment likely to be tenant-led. Based on current plans, once complete, all 3 stages of the redevelopment are expected to combine to create over 70,000 square meters of 5 Green Star rated covered workable industrial area. Moving on to Slide 35, in 2023, we entered into a conditional contract to acquire approximately 5.8 hectares of land within the proposed industrial subdivision in Spedding Road, located at the end of the Northwestern Motorway in Auckland of $40.6 million, with some details on preferred settlement dates shown here on the slide. Indicative plans demonstrate that site coverage of around 70% of the lots to be purchased can be achieved with early concepts allowing for approximately 40,000 square meters of covered workable area once complete, for an estimated total project spend of approximately $130 million including land, a decrease of around $20 million on our initial estimates, this is reflective of both design changes and recent construction estimates received. Consistent with PFI's sustainability strategy, all buildings will be designed and developed to target a minimum of 5 Green Star ratings. Moving on to the final slide, Slide 37. So to summarize, we are very pleased to deliver this set of results. Industrial property as an asset class that has continued to perform in the face of a challenging operating environment, supported by low levels of vacancy and cumulative market rental growth of over 30% in the previous 3 years. Looking forward with our funding lines renewed and extended and gearing comfortably within our target range, the outlook for the company's earnings and cash flows will be supported by capturing embedded growth within the portfolio, as rents are reset all against the backdrop of an interest rate environment that is forecast to materially improve over the next 24 months. Thank you very much. That concludes the presentation. And we would welcome any questions you may have.

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

Congratulations on the great results and leasing activity. In terms of understanding your 16% under-renting figure, I believe in August last year, you pointed to some re-leasing agreements done in Rosebank and East Tamaki that had large re-leasing spreads and are due to commence next month. Would these have been factored into the values assessment of under-renting.

No. So we've got a lease agreement that's agreed at the rent, then that would be in the valuation. So that would be considered on market once it starts.

So judging by the re-leasing activity done over all financial period FY -- financial period, '24, would it be fair to say all else equal if these rents were successfully pushed through your under-renting figure would increase? Just trying to understand the lag...

[indiscernible] what you're trying to say is with those -- once where the spread was larger than what the value was going, have they made their way into the valuation, yes. I couldn't confirm with our -- the specific examples we gave have yet made their way. And I think what we could probably say at a more general level is that we tend to be able to outperform the re-leasing, sorry the under-renting that is being put in the portfolio there. Nic is just pointing something out to me here. Sorry, Nic for that.

Well, market rents is up broadly 3.5%.

Yes. Market rents have gone up broadly 3.5% Nic was -- as saying through the valuation process. So yes -- but look, we continue to be able to sort of seemingly be able to outperform those market rental assessments there. And I think it's probably also why we were making a comment in the market slide around just a work we did when it came to in-house rentals here in Auckland versus that sort of more headline number. So we did a little bit of work just looking at -- yes, at where those warehouse rents are and sort of what they imply in terms of the under-renting, as opposed to the sort of entire.

[indiscernible] I'm looking for a portfolio.

And so, entire portfolio. I mean, obviously, each time they come up with an under-renting value for that statistically will give you that [ 15% ], that's yards, that's canopies, that's offices, those sorts of things like that. But when we look at the actual warehouse rates themselves, we see the warehouse rates has been quite a bit higher than that [ 15% ] in our Auckland portfolio. I think that said is mentioned on Slide -- near the front, sorry. We'll come back to you when we [indiscernible].

No, thanks. That's helpful. That was actually my next question on that 23% figure. Just sort of talking on Auckland...

Yes. [indiscernible] that's Slide 10 is where that is. Slide 10 is... yes.

And then just on Auckland, your portfolio is 86% weighted towards Auckland, which [ is a touch about ] your strategic allocation band? And I assume this figure will also increase upon practical completion of your brownfield developments. Given this continued strength of the Auckland industrial market, would it be fair to say that you'll have, I guess, an overweight towards Auckland for the foreseeable future? Or do you have any intention or plans to revert to your target bands?

Yes. Look, I think probably you would see that 15% as being more of a maximum that we would be out of Auckland rather than saying that we would down weight out of Auckland to get back to that 85%. We'll always hold properly up and down the country, but I think it would be fair to say we'd hold no more than 15%. We're probably out in the other country. And I think going back we will now, you might remember that [indiscernible] probably others might remember the [ PIO ] acquisition at the time, they had properly up and down the company are from Christchurch and the likes, and we are very happy to do that. So it's not an Auckland only strategy, but I'd say it's probably more of a maximum of 15% is the way we look at it. And you're absolutely correct, as these developments keep completing, you will see that number go north of 85%.

And last one from me. Your current dividends came in at the bottom of your payout policy with next year's guidance also expected to be near the bottom of your policy. Would it be possible to provide some commentary as to how you're thinking about approaching using both earnings growth and the payout ratio to grow dividends in the near to medium term. I mean, would it be correct in saying that you're taking a conservative payout ratio in light of the softer macro environment, as well as sort of having more developments on the go, which means there will be earnings growth, not the payout ratio that will be the main driver of FY '25 dividends being greater than at the bottom of your guidance?

Yes. I mean, I think when we start out each year, and we're clearly now sort of still 10 months away from the final print for the year, there's things that we can kind of look at and see with relative certainty. I mean, we've got a large number of fixed rent reviews. For instance, we've got relatively good feeling around the sort of reversion and capturing that sort of under-renting and those sorts of things. Things that are sort of less in our control are obviously, the interest rates side of life, although again, recent activity has been pretty good there. But yes, with a slightly softer sort of macro environment, I guess, we have to be real that tenants come under stress at this time and PFI won't be immune to that. We don't currently have any issues to report on that score. But we have to be real that tenants they come under stress and that sometimes flows through to us. So those sorts of things do weigh in our mind, 10 months out from the result printing. Does that give you the sort of color that you're hoping for there? Or is something else we can help.

We can take this offline afterwards.

Just a moment for our next question, please. Next, we have Rohan Koreman-Smit from Forsyth Barr.

Can you just give us some color on this vacancy that's kind of popped up and where it's come from? And also, I just noticed a couple of comments in there about the expiries this year and 4% of it or so is brownfield development. But then later on the pack, you said you won't do other brownfield development until '27. So I guess, the willingness of the market to take short-term leases in the current environment and potential for more vacancy over the year ahead.

Yes. It's Simon here. So in terms of the vacancy that's popped up, that's one building, so it's 212 Cavendish Drive. So we've got a building that Mainfreight, where their lease finished up in April, May, this year, and we've taken the opportunity to perform a refurbishment on that. So that becomes available for lease in -- or start in September in a couple of weeks. So that's effectively the 1.4% of vacancy there. It's about a $1.5 million [indiscernible] circa. In terms of the 4% of vacancy, brownfield vacancy you're looking at, that's Fisher & Paykel Appliances. So they're still occupying part of our site there at Springs Road. With the completion of Stage 1, they vacate an older building and move into their new building, and that allows us to kick off the Stage 2 redevelopment. So it's a forecast vacancy that we're well aware of. So -- but yes, effectively, if you look at what's coming up in FY '25 and FY '26, it's a -- for this part of the cycle, it's a great place to be, and there's very little actual vacancy coming up that we can forecast.

The other thing, Rohan, just as a little bit more color around the FPA side. They continue to occupy the offices there for a period of time, while they're building new office on Great South Road. And the current arrangement, the way we treat it is that, that arrangement will expire during the period because it's an initial period of -- yes, it's an initial period and then we have sort of rolling expiry thereafter. So that's probably features in some of the numbers as well there, so.

Okay. When do they -- if they leave -- well, let's say, when they leave the office part, you've obviously got Stage 3 here, which will be potentially uncommitted. What happens to the building? Will it move to development so you can capitalize the interest or it's a vacant...

This -- yes with -- yes. And we're still working on the exact plans for that building. There's a couple of different scenarios here, so we just show is expiring is the way it's showing there. They won't be leaving the office till -- guys, I was just going to say they won't be leaving the offices until the earliest of Q1 were March, April 2026. So there's still a bit of time to work through.

There's a lot of comments in here about being able to capture the under-renting across the market. Our conversations suggest it's quite different market environment now and interest rates falling for a reason. Industrial is quite susceptible to broader macroeconomic conditions. Can you just give us some color around recent tenant discussions? And also, we've heard about a decent amount of subleasing kind of coming up in the market. Are your tenants looking to sublease their space as well?

Yes. I mean, we've obviously got close to 130 tenants. So we've got a pretty good handle on it. What I would say to start off with is, we spent a lot of time over the last decade, bringing good quality tenants into the portfolio. So we'd like to think we've got a high-quality set of tenants. A lot of them being around through a lot of the different economic cycles, so they understand that market rents can move up and down. And at the moment, a lot of them will be in a position, where they're probably under market in terms of their rents, and so, are forecasting internally and are expecting rent reviews. So that's probably the first point. In terms of the subleasing, yes, there's definitely been a lift in vacancy in the Auckland market, in particular, and a lot of it comes under that sublease space. Our tenants, there's 1 or 2 that we've talked to about subleases and they're in the market trying to sublease areas of space that they have available. It wouldn't be prevalent in our portfolio is what I would say. But there's definitely some sublease space out there in the market. And I guess for us, that's why securing MiTek for Stage 2, at Springs Road was so pleasing. They've taken post the call it, 9,000 meters of workable space in what will be one of the best quality buildings in Auckland. So that to us is, there are tenants out there, who are looking through this part of the cycle and keen to commit. We think that's a really good thing. So yes, we'll just work with the market, as we always do, but it's definitely challenging from a leasing point of view at the moment.

I think the other thing just to call out, Rohan, is that during the 6-month period, we did 15 renewal transactions. So it's 75% by value. And then once you pull out Tokyo Food, it's much higher because we can't take it if there's a deal done and coming on stream during the period. It's much, much higher percentage. So by and large, at this point of the cycle, if your tenant has a business that is going to carry on through this economic cycle, then staying on and renewing was a sort of vastly superior outcome for them. So that's obviously evidenced in the numbers as well here.

Yes. And then finally, just on funding, just more a longer-dated question, but you kind of talk about looking at funding options. Was it Spedding Road and Stage 3 of Springs. Are we talking more asset sales here. Are you kind of hoping that...

We have 1 or 2 small asset sales there. So yes.

Okay. And that's most of the funding, it's not like kind of -- I hope that your balance sheet gives you a bit more headroom in a few years' time based on the CBRE vision of the world?

I think what we would say is that 36.6% in [ mid-'27 ] is quite a way off. And so, there's plenty of options on the table between now and then, notwithstanding the potential for changes in asset values along the way. So yes.

[Operator Instructions] Next, we have Nick Mar from Macquarie.

Just on the vacancy and the refurbishment you're doing there. Is that [ valuable ] maintenance CapEx, how do you look at that?

Yes. Look, it's top of my head, Nick, I couldn't tell you, sorry. I have the detail in front of me. I know the things that we're doing are -- I mean, we've got a [ flat top ] we're putting on it. There's some green CapEx that we're doing, as part of it as well. But I have to go back to a note and have a look and see how we treat going forward. But the numbers that you see in terms of our forecast, I guess, we take all kind of major CapEx items and look at the detail of them when we forecast them. So [indiscernible] come back to you a bit sort of detail, sorry.

And then on Bowden Road, now you've got the subleases done and the design changes, where are you going to wash up on yield on total project cost on that?

We wash out it around [ 5-ish ], just a touch over [ 5 ] yes.

Including land.

Including land.

Yes. And was that sort of consistent with the original budget, I was just trying to go back and [ then it kicked off ].

I think the original budget was more like 4.5% with anticipated value outcome. Yes. I mean, in terms of the -- we are on budget in terms of the spend, but the value outcome is obviously materially different given where yields are right now versus where we kicked off. What I can say is essentially, if you start out with the land value you add everything that we spent on it and you look at the value at the end of it, we wash it out on that. So we come out even so. Yes, the project is broken even despite a sort of significant change in yields since the point we started it out.

And then just on the yields on Springs Road. Obviously, the first stage was saying in excess of 5.3%, and you're sort of saying in excess of 6%, and that's total project cost. Is there any sort of allocation of sort of site costs [ or there thing ] that's been weighted more towards Stage 1, which is improving the second stage? Or is that purely just the change in rents of which kicked off.

Yes. There's [ definitely ] some site-wide cost that you have to incur to keep that thing going. For instance, we had to split the old buildings out. There are services that were common across the whole site. There's also some nuances in around sort of where people are parking cars and everything like this. I mean, like you [indiscernible] the site, you can recall big it is. So yes, there's definitely been some costs against that.

I think the big difference though is the rents, I think. So Fisher & Paykel signed up effectively on $185 a square meter, whereas the MiTek rents are north of $240 a square meter. So there's been some good growth on the revenue side. And then Stage 2 is predominantly on surplus land. So previously, grass and [ car park ] and with Stage 1, we had to demolish and remove the building. So there's definitely benefits to Stage 2 that went there on Stage 1.

Just a moment, for our next question, please. Next, we have Rohan Koreman-Smit from Forsyth Barr.

I didn't expect my follow-up question to come on, sorry. But you talk in the guidance about OCR and floating debt costs being a risk. Can you give us what you've assumed in that range for interest costs?

So I think it's the forward curve is that the [ 20 ] -- what was the...

Last Thursday.

It's basically the forward curve at the Last Thursday push through it. So I don't have that on me right now, but you guys were there as well, sorry to say, yes, which again is quite -- there's quite aggressive cuts coming through it for sure.

Thank you. I see no further questions at this time. I will now hand the call back to Simon.

Thank you. Hi, and thank you, everyone, for joining us. Obviously, with the change in balance date, we tend to give this out in a timley session, which we've done. As always, Craig and I and Nick are available for any questions or follow-up questions you have, and we're catching up with a lot of you over the next 1.5 days. So once again, thank you very much. We are very happy with the result. From our point of view, we feel like we've continued to perform and deliver in what has been challenging economic conditions, and we've got some good projects planned coming up. So thank you very much. Cheers.

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