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

Good day, and thank you for standing by. Welcome to Property For Industry FY '26 Interim Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Simon Woodhams, Chief Executive Officer. Please go ahead.

Thank you, and good morning, and welcome to Property Industries FY '26 Interim Results Briefing. It's Simon Woodhams speaking, the CEO of PFI. And on the line with me today is Craig Peirce, our Chief Finance and Operating Officer; and [ Nick Moloney ], our Senior Investment Manager and Acting Financial Controller. Moving through to Slide 2. You can see that we have a slightly larger debt than normal. The plan is Craig and I will take you through the presentation, and then there will be an opportunity for participants to the call to ask any questions they may have. going to start on Page 4 of the presentation headed Highlights. We're very pleased to deliver another strong interim result, reflecting resilience of PFI's industrial portfolio and the benefits of our long-term strategy. Highlights include valuation growth, which has continued across our $2.25 billion industrial property portfolio with the 19 properties that received full valuations at the half year, delivering an average uplift of 3.2%. Core assets have delivered annualized rental growth of 7.3% across the $46.2 million of contract rent that was reviewed during the period. $6.6 million of stabilized contract rent was leased during the year with rents being agreed on $3.1 million of contract rent at an average of 14.9% above previous contract rents. We're happy to report that occupancy remains high, continuing to be almost 100% occupied at the end of the interim period. Our key Green Star development projects have been advanced with Stage 2 of the redevelopment of 78 Springs Road nearing completion and continuing to track well under budget and ahead of program. Demolition is complete at 92-98 Harris Road and Stage 1 of Spedding Road is set to commence next month on a speculative basis. Our capital position also remains robust with approximately $154 million of available liquidity, while gearing remains well within our target range at 34.2%. This activity has combined to deliver a very strong interim result with profit after tax of $46.9 million for the period, which is up $18.2 million on the prior interim period. We've also announced a second quarter interim cash dividend of $0.022 per share, with FY '26 dividend guidance increased to at least $0.0905 per share, representing an increase of at least 5.2% on the FY '25 dividends. We now turn to Slide 6, headed delivering strong stable returns. Before we get into the interim result itself, we wanted to just take a moment to reflect on our longer-term measures. Delivering strong stable returns has always been a core focus for PFI, and it remains central to how we manage and grow the portfolio today and into the future. Providing investors with exposure to a diversified portfolio of hard-working industrial properties through shares listed on the NZX is fundamental to that approach. Across a wide range of market conditions, PFI has consistently delivered dependable outcomes for investors, reflecting the quality of the portfolio and the discipline applied to its management. Since inception in 1994 through the 31 December 2025, this focus has translated into an average annual total return of around 9.27%. In practical terms, a $10,000 investment made at inception with all dividends reinvested would today be worth more than 15x that original investment. Moving to the next slide. Delivering regular and growing income has also been fundamental to the PFI investment proposition. Our policy is to distribute 90% to 100% of AFFO on a rolling 3-year basis with the clear objective of providing investors with a reliable income stream that grows over time and protects the real value of that income. Since 1994, we have paid a dividend every year. And importantly, that dividend has grown steadily over time with dividends per share increasing at an average rate of 1.9% per annum since inception. Looking to FY '26, we are pleased to continue this trajectory, guiding to cash dividends per share of at least $0.0905 per share, an expected increase of at least $0.045 per share or 5.2% on last year's dividends. Turning to Slide 8. Growth in net tangible assets, or NTA, is another key measure in terms of how we create long-term value for investors. While valuations will fluctuate with market conditions, since listing, PFI has grown NTA per share by remaining disciplined through multiple cycles. That discipline starts with a clear focus on industrial property, where we acquire and actively manage high-quality assets, drive rental growth and maintain high occupancy. We recycle capital where appropriate, divesting assets to reinvest in opportunities with superior returns, including developments where we also capture development margin. This is supported by a prudent balance sheet with diversified funding sources and disciplined gearing and hedging. Together, these elements have worked across cycles to grow NTA to $2.88 per share as at 31 December 2025. So if we turn to Slide 10, we'll start to take a look at the last 6 months. PFI's portfolio has continued to benefit from strong re-leasing outcomes and structured rental growth. Here, we have a summary of the statistics as at 31 December. You can see that the company now owns a portfolio of 94 properties leased to 125 tenants. Through structured rental growth and asset management initiatives, contracted rents grew to $116.3 million at the end of December 2025. The portfolio remains essentially fully occupied at 99.9%, reflecting the high quality of both our properties and the tenants in our portfolio. Lastly, the company's weighted average lease term decreased slightly to 5.37 years over that period. This is a function of having low levels of expiries in the current financial year. Turning to Slide 11. In line with our valuation policy, we revalued 19 properties at the end of the interim period, resulted in a write-up on those properties of $17.1 million or an average increase of 3.2%. The valuation outcome was attributable to realized rental growth and development progress at Stage 2 of 78 Springs Road. As a result of portfolio and valuation activities, PFI's passing yield increased by 13 points to 5.34%, while the portfolio market cap rate remained stable at 5.74%. On a like-for-like basis, market rents were estimated to have grown by around 3.2% over the period across the 19 properties that received full valuations. PFI's portfolio is now assessed to be around 9.1% under-rented at the end of the interim period. Turning to Slide 12. During the interim period, the team completed leases on almost 50,000 square meters of area or 5.8% of the portfolio by rent for an average lease term of 7 years. Of the $6.6 million relating to stabilized contract rent, rents were agreed on $3.1 million of this with those rents settling 14.9% above previous contract rents. The remaining $3.5 million of stabilized contract rent secured during H1 FY '26 is subject to market review on renewal. After factoring in review caps, those 4 leases have been assessed at being around 14% under-rented at the end of December 2025, with a weighted average review date of October 2026. Moving to the next slide. As I mentioned earlier, the portfolio is essentially fully occupied at 99.9% and the near-term expiries are very, very manageable. As the graph on the left-hand side illustrates, all material FY '26 expiries have now been leased. Excluding properties held at development opportunities, $10.2 million or 8.8% of contract rent is due to expire in FY '27, with the team continuing to make meaningful progress on some of the more material FY '27 expiries post balance date. Turning to Slide 14. 57 rent reviews were completed during the interim period, resulting in an average uplift of 8% or 7.3% annualized on $46.2 million of contract rent. Almost 40% of our portfolio is subject to some form of lease event during the second half of FY '26 with just 0.1% of contract rent due to expire. $7.7 million of contract rent or 6.6% of the portfolio is subject to a market review in the second half of FY '26. And those market reviews are about 15% under-rented as at December 2025 after factoring in review caps. PFI's core portfolio continues to deliver growth by structured rental growth and re-leasing spreads with a portfolio under-renting gap of around 9%, providing further tailwinds, noting that market reversions continue to be settled in excess of value assessed market rents. I'm now going to hand over to Craig, who's going to speak to several topics, including a review of the interim results. Craig?

Well, thanks, Simon, and good morning, everyone. Thanks for tuning in as we share PFI's FY '26 interim results. As I mentioned earlier on the highlights slide, profit after tax of $47 million was up $18 million on the prior interim period. FFO was up 32% to $0.064 per share per share and AFFO was up 24% to $0.539 per share, with all measures buoyed by the early lease surrender payment at Harris Road. As a result of the strong results, cash dividends for the year -- for the half year, sorry, of $0.044 per share have been declared, and we'll dig into the numbers a bit more now. Turning to Slide 16. On this slide, we take a look at net rental income, which at $62.6 million is up $10.7 million or 21% on the prior interim period. A key contributor during the half was an additional $4.3 million from the early lease surrender at Harris Road. The other main drivers were positive leasing activity across the portfolio, contributing an increase of $5 million and the completion of development projects at Bowman Springs Road contributing a further $1.6 million of additional rental income. Moving now to Slide 17. Here, we see how the 6 months of activity has translated into adjusted funds from operations or AFFO. On the positive side, net AFFO level net rental income was up $9.2 million or $0.183 per share on the prior interim period. Largest offsetting factors were $0.43 per share increase in tax, driven by higher earnings as well as an additional $2.1 million or $0.04 per share of maintenance CapEx, which is tracking at around 37 basis points on an annualized basis. After normalizing for the early lease surrender payment at Harris Road, underlying AFFO earnings were up $0.42 per share or 9.6% on the prior interim period. Turning now to Slide 18. And turning our attention to dividends. PFI Board has today resolved to pay a second quarter dividend of $0.022 per share, with the dividend reinvestment scheme not operating for this dividend. The second quarter dividend will take cash dividends for the first half of FY '26 to $0.044 per share. At the beginning of FY '26, we guided to dividends of at least $0.089 per share. Today, reflecting a strong first half performance and positive trading conditions, we are upgrading that guidance to at least $0.0905 per share, which is an increase of $0.45 or 5.2% on FY '25 dividends. Cash dividends at that level are anticipated to result in a dividend payout below the lower bound of PFI's dividend policy range and around 86% of AFFO on a 1-year basis. However, after normalizing FY '26 earnings for the early lease surrender payment at Harris Road, dividends of at least $0.0905 per share are expected to be consistent with the payout ratio at the bottom of the dividend policy range and represents around 90% of AFFO on a 1-year basis. So turning now to Slide 19 and looking at the balance sheet. Here, we provide more detail on the change in value of PFI's investment properties valued at $2.25 billion at the end of the period. So during the period, we completed acquisitions in Hamilton and on Mount Wellington Highway in Auckland. We also deployed $30 million on capital expenditure with the majority of this being spent completing stage or getting near to completing Stage 2 of the company's Green Star development at Springs Road. In addition, as Simon mentioned earlier, full valuations were undertaken on 19 properties, resulting in a valuation write-up of $17.1 million or 3.2%. Turning to the next slide, Slide 20, where we look at net tangible assets, which increased by $0.047 per share or 1.7% with the increase being the result of that positive interim revaluation gain and retained earnings with EBITDA slightly offset by a decrease in the fair value of our swaps. Speaking of swaps and moving on to capital management on Slide 22. First half of FY '26 saw us repay the $100 million PFI020 bonds as well as reclassified tranche C of our syndicated bank facility as green debt, aligning PFI's overall green facilities with the continued growth in PFI's green assets. After the end of the interim period, we announced the unconditional agreement to dispose of properties in New Plymouth and Christchurch for a combined $19.1 million with those proceeds being recycled back into that Green Star development pipeline. And looking forward, whilst the bank loan market remains very supportive of PFI, as announced this morning, we are considering an offer of 6.5-year senior secured fixed rate bonds to further extend the duration and diversify our borrowings. Moving on to Slide 23. On this slide, the top chart shows our bank and nonbank facilities and the lower chart illustrates our hedging profile. As can be seen by that lower chart, interest rate hedging provides for an average of around 74% of the company's debt to be hedged at an average fixed rate of 3.07% during the second half of FY '26. Turning to Slide 24. Here, we have a bit more detail on committed gearing. So following all committed acquisitions, divestments and projects and excluding any future revaluation impacts, development margins or general portfolio CapEx, we see gearing lifting to around 36.3%, well within PFI's target range. PFI has sufficient facilities available within our existing funding envelope to fund the company's near-term development pipeline and potential bond offer announced this morning, potentially providing further liquidity. Moving now to Slide 26. This slide summarizes our progress against our sustainability targets. First, all significant new developments continue to target a minimum 5 Green Star certification with all completed developments achieving the standard and projects in progress remaining 100% on track. Second, our Solar Power target is to reach 1.4 megawatts by the end of FY '27. During the interim period, we progressed scoping work and tenant discussion with this initiative largely in the scoping phase. But pleasingly, an additional installation was secured as part of a lease deal post balance date. Third and finally, on LED lighting, our target is to achieve 80% lighting -- 80% of tenancies by FY '28 with 63% of the portfolio already converted, representing great progress towards that goal. So 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. We're on Slide 28 now. I'm just going to touch on current market conditions. While e-commerce has grown steadily over the past decade, online penetration in New Zealand remains low compared to other developed nations, providing a meaningful runway for future growth. That structural theme remains an important demand driver for industrial and logistics assets. Looking ahead, CBRE expects online spending growth to remain resilient, broadly in line with recent history, supporting continued expansion into logistics and distribution requirements over the medium term. As a result, Auckland's industrial prime occupancy requirements are forecast to increase by around 30% by the end of the decade, reflecting ongoing demand from e-commerce linked tenants. Turning to vacancy. We have seen some modest normalization over the past year with vacancy lifting from historically low levels. Importantly, however, vacancy remains around long-run averages and below levels typically associated with a softer market. Looking forward, as the economic recovery gains momentum and e-commerce continues to underpin demand, forecast net absorption is expected to exceed new supply over the next several years, which should place renewed downward pressure on vacancy rates. Turning to Slide 29. Following several years of exceptionally strong rental growth, prime net effective rent softened slightly through 2025, driven largely by higher incentives. Importantly, this reflects a period of vacancy normalization rather than a structural shift in tenant appetite. Looking forward, CBRE expects rental growth to resume from 2026 before strengthening more meaningfully from 2027 onwards as net absorption once again outpaces new supply. This is consistent with prior cycles with periods of incentive expansion have been followed by renewed rental growth. From a valuation perspective, improving vacancy, a return to rental growth and a more accommodative interest rate environment are expected to support yield firming over the medium term across both prime and secondary industrial assets. Taken together, CBRE is forecasting attractive total returns through to 2029, underpinned by resilient income returns and renewed contribution from capital growth as shown in the lower chart. Overall, this outlook remains supportive for PFI's portfolio given its income quality, leasing profile and exposure to well-located industrial assets. Turning to Slide 30. This slide highlights our positioning in context of the current market environment and the outlook ahead. Following a period of exceptional rental growth, the industrial market has entered a phase of normalization, which is reflected in leasing incentives and near-term rental outcomes. Importantly, the forward indicators point to improving conditions and PFI's portfolio is well positioned to manage through this period with limited risk. From an earnings perspective, the portfolio remains around 9% under-rented, providing a clear runway for organic growth as rents reset over time. In the near term, second half FY '26 market reviews represent a meaningful portion of contract rent and remain materially under-rented even after the application of review caps. At the same time, near-term lease expiry exposure is minimal. All material FY '26 expiries have been leased and the FY '27 expiries are at manageable levels with good progress already made post balance date to further reduce exposure to market conditions. This resilience is supported by strong tenant demand reflected in an average tenant retention rate of around 77% since 2021, underscoring the quality, location and functionality of the portfolio. Finally, PFI remains -- retains strategic flexibility through its approximately $325 million Green Star development pipeline, providing optionality to deploy capital selectively and in a disciplined manner as conditions and returns allow. Taken together, PFI is well positioned to navigate the near term and capture growth as market conditions improve, supported by embedded rental growth, limited near-term expiries and disciplined capital deployment. Turning now to Slide 32. As many of you on the call today will already know, when we look at our portfolio, we split it into 4 categories or buckets. Over the next few slides, we'll take you through some of the key priorities for the company, including how these strategic allocations support our broader goals around capital deployment, earnings growth and sustainability. Looking at our priorities through the lens of our development opportunities first. Developments continue to be an attractive use of capital with current feasibility targeting initial yields on cost of 6.5%, providing a significant spread to recent acquisition yields. Target development margins of 15% to 20% allow us to create value that's accretive to NTA and supports gearing efficiency. Typically representing 5% to 15% of the portfolio, developments also enable us to regenerate older assets into best-in-class 5 Green Star industrial facilities, aligning with growing demand for sustainable space. Moving over the page, Slide 34. On the horizon, we have several near-term development opportunities. Following the successful delivery of Stage 1 of the redevelopment of 78 Springs Road in October 2025, Stage 2 is nearing completion and tracking under budget and ahead of program. The balance of the site being Stage 3 could see the development of a 17,500 square meter warehouse and could commence in H2 FY '29 following the completion of demolition and asbestos removal works relating to the existing warehouse at the site. PFI settled the acquisition of 5.8 hectares of greenfield land at Spedding Road last week, providing us with the opportunity to invest a total of around $140 million over the next 3 to 4 years. I've got more on that in a moment. The early lease surrender at 92 to 98 Harris Road unlocked and accelerated access to a site long earmarked for development. Demolition of the existing structure is complete with the prime 2.63 hectare site to be cleared and held until an anchor tenant is secured. We have a number of other development opportunities within the portfolio with more details on these provided in Appendix 4. But today, I'm going to focus on the near term. So moving through to Slide 35. Here, you can see the progress being made at Stage 2 of Springs Road, along with some of the key development metrics. Stage 2 is due to complete at the start of Q4 FY '26. And as previously announced, PFI has secured MiTek on a 12-year lease, over 6,500 square meters of warehouse and around 2,500 square meters of Breezeway Canopy. This underpins the second stage of the redevelopment of this site. Leasing inquiry on the speculative component being a 4,800 square meter warehouse ramped up during the first half of FY '26 and securing a tenant for this development remains a key priority for the company over the second half of the financial year. Based on current cost and leasing assumptions, we remain confident this stage will deliver a yield on value in excess of 6.5%, including land. Turning to Slide 36. On this slide, we set out the key development metrics for Stage 1 at Spedding Road. Stage 1 is set to commence in March and will proceed on a speculative basis with the completion expected in Q4 of FY '26. The initial stage comprises around 8,500 square meters of Green Star-rated industrial warehousing with a flexible design allowing for multiple units ranging from approximately 1,800 square meters through to the full building. The project is expected to involve an investment of around $40 million, including land and is targeting a yield on cost of 6.5%. That flexibility is a key feature of the plan for Stage 1 as it allows us to respond to a broad range of tenant demand, particularly for high-quality midsized warehouse space while positioning the project well to capitalize on any leasing momentum through the delivery period. Moving on to Slide 37. Here, you can see a render for the plans at 92 to 98 Harris Road, again, with some of the key development metrics. Following the tenant's early lease rent in August 2025, we moved quickly to take advantage of the softer construction market conditions with demolition now complete. The site has been cleared and secured, leaving us well positioned for the next phase. Current master planning provides for a circa 14,500 square meter industrial facility. Redevelopment would involve around $40 million of additional investment, excluding land and is targeting a yield on cost of 6.5%, including land. Importantly, any redevelopment is expected to be tenant led. And now the site will be held ready, allowing us to respond quickly once an anchor tenant is secured. Moving now on to Slide 38. We currently have 11 planned projects across Auckland's key industrial precincts, representing around $325 million of committed and potential capital investment. That figure excludes the value of land. These projects are expected to deliver embedded value progressively over the next 5 years as they reach completion and leasing activity captures market rents and development margins. Since the start of 2024, we have completed over 55,000 square meters of 5 Green Star-rated industrial space, all delivered on time and on budget, a strong track record we intend to build on. Moving to Slide 39 and our core generic assets. These are established, well-located industrial properties with long-standing tenants providing stable income and low vacancy risk. The broad tenant appeal supports strong leasing depth and liquidity while modest maintenance requirements add flexibility. Core generic assets also include completed developments as we progress through our Green Star development pipeline, overall portfolio continues to improve. Moving on to Slide 40. This slide highlights the acquisition of 505 and 507 Mount Wellington Highway, which sits firmly within our core generic portfolio for now. It offers redevelopment opportunity over the much longer term, given the acquisition has created around 3.3 hectares of contiguous industrially zoned land in the heart of Mount Wellington. At $36 million, this represents our first acquisition of scale since late 2021, delivering immediate income at an initial yield of 5.75%, supported by leases to high-quality tenants, Dave Russell in Johnson & Johnson. Importantly, the acquisition reflects a measured return to purchasing existing core assets as a means for growth as market conditions improve. Turning to Slide 41. The last category for today, noncore holdings, sit outside the long-term strategic focus of the portfolio and are actively managed for value realization. Asset recycling is a key part of our capital management strategy. And since transitioning to a pure-play industrial vehicle at the end of 2021, we've divested $93.5 million of noncore assets at an average of around 2.5% above valuation, which doesn't include the recently announced divestments on the following slide. As announced on the 16th of February, we have agreed to sell 2 Smart Road and 18 Consent Street in New Plymouth, along with 41 to 55 Foreman Road and Christchurch in a single transaction for a combined $19.1 million, representing a small premium to the most recent valuations. Since acquiring the assets in 2017, we've delivered a combined property level IRR of around 9.8%. The proceeds will be recycled into our development program with settlement expected in late March 2026. Moving on to the final slide. So to summarize, we are very, very pleased with this result, which reflects the disciplined execution of our strategy and the underlying strength of the portfolio. We've delivered strong earnings and dividend growth with AFFO up almost 10% even after normalizing for the early lease surrender at Harris Road and increased FY '26 dividend guidance to at least $0.0905 per share, representing at least 5.2% increase on last year's dividends. This performance has been supported by continued valuation growth, strong leasing outcomes and near full occupancy across the portfolio. At the same time, we've advanced our 5 Green Star development pipeline, maintain gearing below the midpoint of our target range, giving us flexibility as conditions continue to improve. With a high-quality, well-leased portfolio and roughly $325 million of development pipeline, PFI enters the second half of FY '26 well positioned to deliver sustainable earnings growth and growing returns for our shareholders. Thank you for your time. That concludes the presentation. We would happily take any questions you may have.

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

Congratulations on the solid results. Just a couple of questions from me. Would you be able to provide some more commentary on the post balance date progress you have made on the FY '27 lease expiries? What needs to happen from now for a contract to be signed?

So there's 2 reasonably large expiries that we've agreed commercial terms and are in the process of documenting. So both one is $1 million and one is close to $2 million. So circa $3 million has been agreed in principle and just waiting for documentation to be signed.

Okay. That's great. And then on your leasing, are you able to give an indication where the $3.1 million of contract rent was against the market assess rents from valuers?

Sorry, Nick, could you just give us a bit more color on that? So...

[indiscernible] 3.1 million leasing of expiries over the period, I believe, with -- I think it was like a 14 or so percent uplift on previous rents. Are you able to give an indication of where those rent fits or where those rents sit against the market assessed rents from the independent valuers, like were they above or below? I believe this is something you previously disclose.

Yes. Okay. Look, I don't have that detail in front of me. I think in a general sense, we were settling around or above those value assessed market rents unless there was a cap involved in some of those deals. So let me just have a look here. Nick saying we're about 8.5% above the market assessment when we look at the detail of those.

Next, we have Vishal Bhula from Jarden.

Congrats on the solid result. And apologies, I was a bit late to get on the call, so I may have missed the update on bidding. But could you provide a bit of color about what's actually going out there? Like is there a lot of development activity currently in that area? And is anyone else doing anything on a spec basis?

Yes. So the official opening of Spedding Road was actually this morning, Vishal. So there might be some [ fees ] on that. Yes, there's 3 people who have already started development works on site. So 2 adjacent to us and 1 across the road. So yes, if you go out there this morning, polar bathrooms are about 60% of the way through their development. They started ahead of title being issued. Transit bus have completed a electric bus terminal out there, and there's another large occupier across the road from us, CDB, who is an owner-occupier building 13,000 square meters. So a lot of activity already on site ahead of settlement of titles, which gives us some confidence. We're building a single building structure of around 8,500 square meters that we can split into up to 4,000 -- sorry 4 separate units. So we call it a flexible building pod essentially. So we can service anyone from 1,800 square meters up to the full building depending on delivery. So yes, nice flexible building. We're pretty confident that during the build period, which I think in the presentation, I might have said Q4 2026, I meant Q4 2027 is when we'll be completing that.

Yes. And so probably a little bit of further color here, Vishal. There are some people who we understand may consider the speculum space out there as well. For instance, we understand someone might be doing 3 units ranging from 750 to 1,500 square meters and the like. But as best we can see, there's not a lot of additional space being put up out there. And then the broader kind of possible Westgate, that sort of thing. Again, there is a little bit of space out there that's available. But as Simon said, we're building a pretty flexible space there. It can go between anything between 1 and 4 parties. And we think that, that's the right place to be pitching the product in that market.

No, thanks for that comprehensive update. I appreciate that. And then on Harris Road, given you guys have done all the demo and prep work and you're just waiting to get a tenant before you had go, are you able to cap interest on that site now?

No. I think we just looking at Nick here. I think we don't have kept interest forward just sitting on our hands on that. So that's actively underway unless we're actively underway. We don't in terms of our numbers.

No, perfect. That makes sense. And then just lastly, before I give someone else a shot. Just in terms of your guidance, you have normalized for Harris Road to say be about 90%-ish payout. Are you able to give a bit of detail on what sort of investment boost you assume in that guidance?

Yes. I think the main item will be that we will be completing the Springs Road project through that period. And so obviously, that's a pretty significant project and 20% of the cost of that gets capitalized. [indiscernible] Sorry, 20% gets counted under investment boost for that. And again, you would have seen, I guess, slightly elevated maintenance CapEx this time around. Those items are also eligible for that as well, so.

Next, we have Paul Koraua from Forsyth Barr.

Maybe I'll just pick up on the guidance comment there. So you've guided to 90% AFFO payout of underlying that's sort of second year running now. What are you guys thinking about in terms of your 3-year rolling AFFO payout and what you need to see to maybe pick up that payout through '26 and '27. Obviously, your expiries for the rest of this year is pretty low. And as you roll into next year, you've now got 2 years running where you're paying right at the bottom of that range. So should we expect sort of a larger pickup through '27? Or what should we expect there?

Yes. I think on one of the slides quite early on in the pack, we talk about sort of targeted earnings growth when you look at the slide that shows the dividend there, Slide 7, we talk a little bit around sort of targeted earnings growth and those sorts of things. I think when it comes to moving up that payout ratio, clearly, we have a number of moving parts when it comes to developments and some of those larger expiries and those sorts of things like that. And so as we tidy those sorts of things away, pre-commits on Paris, that sort of thing, you might see us start to move up that range there. But I would say it's a good position to be in to be at 90% rather than some who perhaps are further up that range there because it does give us the flexibility as we go into these projects and deal with these bigger leases.

Yes. No, that makes sense. It's just with some of the comments you guys are talking about with net absorption over the medium term looking pretty supportive as well as your development completions, it sort of looks like except for those development completions that you need tenants for, you guys are pretty well positioned to move up that range.

Yes, hopefully, yes.

Maybe we just move to some of the commentary around the leasing then on -- you're obviously [ Spedding Road ] you're now kicking that off spec. I think there was commentary last time around that having discussions with a potential tenant. And then maybe just on Stage 2, you said leasing interest has picked up for the half. Maybe any more color you can give on Stage 2 of that [indiscernible]

Yes. So Stage 2 at Springs Road, we noticed a noticeable sort of uptick probably in October, November last year. We haven't actually landed anyone yet. And as we said, that's a key priority for us going forward. It went a bit quiet through December and the start of January. So we're dealing with a couple of potential tenants, but we're not at paperwork with anyone at this stage for Stage 2. The Spedding Road tenant that we were dealing with failed to get offshore approvals for the deal that had been agreed onshore. So we are kicking the whole building off on a speculative basis. And as Craig said, we can deal with anyone from 1,800 square meters up we're probably not expecting too much tenant engagement. When you get down to that smaller size, sort of 1,800 square meters, [ 2,000 ] they tend to move a little bit later in the pace. So given we won't be starting until March and completing until April, May next year, we're looking towards the end of this calendar year is how we're thinking from a tenant point of view, but we're very comfortable with where everything else sits.

And so maybe just picking up on that and sort of more broadly, where has the tenant demand, I think, been the deepest in terms of shed size? Is it in that mid- to small size where it's been deeper or...

At the moment, I would say that, yes, there's probably -- if you look at the market currently, it's getting up around that 3% vacancy. There are several larger sheds that are available. If you wanted a 10,000 square meter shed, there's quite a few options out there compared to a couple of years ago. So yes, it seems to be the activity towards the second half of last year was in that sort of 1,500 square meters up to 5,000 sort of range. So it's that part of the cycle where there is some absorption to happen. I saw the retail figures that came out last night look pretty good for the last 3 months through to December 30. So that takes a little while to flow through, but there's definitely some better commentary coming through from various sectors. So yes, as we move through the year, we'd expect some of that smaller stuff to be swallowed up and then it moves up the range as people get more confidence.

I think -- sorry, just to comment on that, the key for us when we're looking at some of these projects, the likes of [indiscernible] yet to be leased part of Springs or Spedding. It's just about having a size unit that hits that out of the market or there is a bit of flexibility to flex up or down depending on sort of what's out there. And that's how we're sort of responding to the market dynamics in that way.

[Operator Instructions] Next question, we have Shane Solly From Harbour Asset.

I've got 3 questions, if I may. First one, it is a bit of a mixed economy out there. Can you talk about how you're positioning the portfolio versus other cycles? That's the first question. When you look at it slightly different positioning, how do you think you set for a mixed economy?

I think if you go back 18 months, Shane, we sort of recognized that vacancy was at historic lows. And the portfolio was close to 100% full, and we had some rather large expiries coming up through '26, '27, and we made a pretty conscious decision to get ahead of that. So a lot of what you're seeing today in terms of full occupancy was part of a deliberate management sort of action 18 to 24 months ago. So that's playing out quite well for us. As you know, everything moves in a cycle. So when it's very strong, that's the time to try and tidy things up. So it is mixed out there. We are at 99.9%. So we're very, very happy with that, and we think that's a strong result. So really just getting ahead of what we can control and that's engaging -- just good asset management, engaging with tenants early, being prepared to manufacture deals that work for everyone and keep that portfolio 100% occupied. And then I guess on the capital side...

Kind of building on that, there's also, I guess, the financial settings when it comes to the financial settings, as the question was earlier, we're at the bottom end of our dividend payout range. So that gives us some flexibility to deal with demand changes. We've got a pretty decent level of hedging there in terms of 75%. Committed gearing is very much under control. We've got liquid assets if we need to be matching that capital against some of our development activity. So I think there's a good suite of measures there. And that slide that we put the third slide under the market part of the pack as well, I think that kind of tries to capture how we're sort of thinking about our positioning at this point in time.

Second question, debt margins are coming in, they're falling. In terms of your guidance, what are you assuming in terms of debt costs?

I think with 75% hedging, there's not a huge amount of movement in that. Obviously, this morning, we've announced another senior secured bonds. So we'll look to put that in place if we can get the right demand profile and pricing for that. Yes, so we're clearly getting a little bit of benefit, 25% of our book is on those really nice low floating rates. But I don't think you're going to see a sort of material change from the number that we put out this morning in terms of our weighted average cost of debt. Clearly, we're sort of through the easing cycle now to the other side of it.

Just a final one. In terms of capital allocation, thanks for the detail there. So in terms of the best use of capital for PFI for the next foreseeable future, it is the development pipe is what you're favoring within the mix?

Yes. I think if you look at recent acquisition we made at Mount Wellington Highway, there was a strategic reason for buying that. It gives us 3.3 hectares in Mount Wellington, but we paid 5.75% for it, whereas the development pipeline is bringing in best-in-class assets typically with long leases at 6.5%. So there's a good margin there. There's better building quality and quite often really good underwritten income from tenants. So at the moment, that's probably the key focus, but we're always looking outside of that as well.

I see no further questions at this time. I will now pass back to Simon.

Thanks very much for taking the time to listen. And again, we're catching up with a lot of you either later on today or across the coming weeks, I would say, up and down the country actually, which will be good. So yes, as always, any questions, just feel free to reach out to Craig, Nick or myself. Thank you for your time.

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