Qube Holdings Limited (QUB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Qube Holdings Limited Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Maurice James, Managing Director. Please go ahead.

Thanks very much, and good afternoon to everybody on the call. I have, as usual, our CFO, Paul Lewis, with me. And what we'd like to do is just quickly run through the news of today and then open it up for some questions. Obviously, we're extremely pleased to welcome Woolworths to Moorebank. This has been a project that's been at least 3 years in the making for both Woolworths and ourselves. And as I said, we're extremely pleased with the announcement today. And in fact, exchanging binding agreements, 2 lease agreements and 2 development management agreements with Woolworths covering 2 facilities, as you probably have all read, the national distribution center and a regional distribution center in the Woolworths language. What I propose to do is just quickly go through an overview of the transaction, some of the benefits. And then I'll hand over to Paul to just quickly talk about funding and the Moorebank monetization process and a little bit of guidance around the CapEx guidance. So obviously, you would appreciate that the details of the agreements are confidential. And Woolworths has clearly respected that, and we intend to respect that as well. For those who have followed us for some time, Woolworths was the party that we've previously signed the reservation agreement, for those who recall, over 150,000 square meters of land that we've previously indicated, an equivalent of about a 75000-square-meter warehouse on that land. That land reservation agreement was for land to the very South of the Western side of Moorebank. In signing these agreements, that land is not going to be used for the warehouses. And in fact, the 2 warehouses will be more centrally located on the Western side for those who are given the site. Obviously, there's significant benefits to Woolworths of having both the regional DC and the national DC on the same location, giving them supply chain benefits going forward. Just for those not familiar, the national DC predominantly focus on bringing products that we use for Botany and the IMEX and the supply chain from ports imported products into the national distribution center; and the regional distribution center, very similar to the Woolworths facility that they have pioneered in Melbourne, where that will assemble pallets for -- receive products from the national distribution center, but also from suppliers and palletize in an automated sense delivery to store. So we're very excited to have both facilities side-by-side at Moorebank. The footprint that was discussed in the press release is about 27 hectares. And the warehouse combined sizes, as we've said, 40,700 square meters and a 34,000. So just on 75,000 square meters in total. That is less than our indicative master plan, where we were anticipating roughly 2 square meters of land for every square meter of warehouse. But in this case, these are high by high-tech warehouses that cost a lot more to build. And therefore, the value comes in the facilities, and these facilities are in the order of 40 to 42 meters high, like the one in Melbourne. As indicated, the capital cost -- the estimated cost is in the range of $420 million to $460 million. That includes some contingency and nuances, and it includes some interest that is capitalized during the build phase of the facilities. This is essentially funding the external build of the warehouses for Woolworths, and they will be funding the fit-out and the automation of those facilities. The development management agreements have been structured in such a way that Woolworths is, in fact, managing the warehouse construction. So Qube will not be doing that. And as such, Qube's risk regarding timing delays and planning approvals is very limited under the development management agreements. What Qube -- what we're doing is actually funding those progress payments as construction proceeds over the next 4 years. The other point in regard to that capital cost is that we do have an agreement with Woolworths that caps that capital expenditure. And anything above -- I'm not at liberty to give you the specific number, but anything above that cap, Woolworths bears the responsibility for additional construction costs. The rent that we've indicated is a net rent after payment of land to land trust, obviously -- of $30 million per annum. Obviously, that varies depending on the final construction cost in that $420 million to $460 million range. The initial lease term is for 20 years with 6 5-year options beyond that. We're quite comfortable with that term given the high capital cost and the degree and the expenditure that Woolworths will be making on finance and automation. The agreement has annual fixed rent escalation during the initial 20-year period with market reviews at the end of the 20 years with some caps and collars, which are consistent with what market practices we're seeing today. Obviously, one of the questions, I'll preempt some of the questions, is that the arrangement today and the lease does not cover any Qube logistics services or services contracts with Woolworths. As most of you will be familiar, Qube logistics already has Woolworths as a customer nationally, bringing product through ports to distribution centers. And given the time frame of this development over the next 3 to 4 years, it was felt that we would be continuing our existing relationship with Woolworths as Qube Logistics and have plenty of time to negotiate our arrangements going forward closer to their occupation date. The first warehouse is expected to be operational in the second half of calendar 2023, so first quarter of FY '24, and then the second facility to be operational in the fourth quarter FY '24. There is no commitment -- like the IMEX and like Qube Logistics, there is no commitment with Woolworths to use the interstate terminal. But clearly, having a national distribution center at Moorebank, in closing, today, they have 2 national distribution centers, 1 in Melbourne and 1 in Sydney. Closing the Mulgrave national distribution center, there's been considerable discussion around the opportunities in the future to move product into state by rail through Moorebank and the interstate terminal once developed -- both facilities are developed. Qube's role in preparing the site is we have, obviously, responsibility for land preparation works, what we call benching works on the West. That's been done in conjunction with the Moorebank Intermodal Company that has responsibilities for the remediation of the site. We have responsibility under the development of our management agreements to deliver 2 pads, 1 for the RDC and 1 for the NDC. The first pad is due to be handed over in September this year with the final pad handed over in December this year. So that Woolworths then takes on the site for the construction purposes. Woolworths also has planning approval risks. And the parties have been working closely. Woolworths have prepared a planning application. This is what we call the modification for every warehouse we build, we have to submit planning modification. Approvals to New South Wales planning. Those documents, we expect to be submitted in the next few days. Again, that is with Woolworths. Just back probably to the commercial agreement. Rent commences for each warehouse upon commencement of operations. Obviously, we are very excited about this development. As I said, it's been 3 years in the making. But to us, it clearly validates the strategic vision for Moorebank and clearly validates the development for us going forward. And clearly, targets for us in terms of other opportunities will be other retailers and the suppliers to Woolworths, in particular, as we move forward. The benefits, there are significant benefits to Woolworths. It's really for them to comment on that. But obviously, as you're all aware, and as linking with our vision, our investment in automation at Port Botany at Patrick, an efficient supply chain from Port Botany to Moorebank, the future vision of automated rail operations at Moorebank and transfers to warehouses from the IMEX terminals obviously gives significant benefits. And for those who have looked closely at the concept drawings from Woolworths, there will be an automated transfer of pallets from one facility to the other abs ground as part of that development, so that they can move pallets from one facility to the other or back. So clearly, for them, it's taking significant truck movements off the road, moving products from what is today a national DC to a regional DC. Obviously, co-location takes out enormous costs for them. There's all the other strategic benefits of being located at Moorebank that we've talked about previously around our vision and our strategy. I'll probably leave it there. I think that's sort of the high level of commercials as far as I can go. Hopefully, that's given everyone a little bit more understanding of the transactions. And I'll hand over to Paul just quickly.

Great. Thanks, Maurice, and good afternoon, everyone. Looking at funding, obviously, with the indicative CapEx, it's a significant funding task. But as Maurice touched on, there's very limited funding until FY '22 with the majority of the funding being undertaken over 3 years for FY '22 to FY '24. So we do have quite a bit of time to determine the optimal funding structure. We will be considering a range of funding options. This may include partnering through the property monetization process that's underway, and I'll talk more about that in a minute. We'll also consider asset level financing, given the long-term nature of the lease and the quality counterparty, and we also may consider issuing some more asset listed subordinated notes or a combination of those. So clearly, we do have a lot of funding optionality, and we'll refine that over the period between now and when we've got to spend the CapEx. Turning quickly to the status of the property monetization process. The process is continuing. As we have indicated previously, Minto is proceeding ahead of Moorebank, given it's a much more discrete asset without some of the complexity of Moorebank. The Moorebank process is also ongoing, but, as we've indicated, will take longer. And clearly, our view is today's announcement has a very positive value impact for Moorebank. So we did want to wait until we're able to communicate the details of the transaction, and it was finalized to the parties involved in that before accelerating that process because we want to ensure that the value and the general risk assessment of the project accurately takes into account the benefits the Woolworths leases bring to the project. And we'll provide further update on the monetization process with our full year results or if there are any material developments. Turning very quickly to the comment in the announcement about the higher CapEx guidance for Moorebank. We did indicate that there is an additional $60 million that we estimate due to the recent outcome of the arbitration that we're involved with the Moorebank Intermodal Company as part of the Moorebank Avenue upgrade works. In addition, as part of our normal budget process, we are reviewing the total minimum forecast costs of the project. It is a very difficult process because a meaningful driver of the actual costs related to planning approvals and any conditions that are attached to that as well as the actual warehouses that we plan to develop and the related impact that, say, higher specification warehousing such as the Woolworths warehouses have on the required infrastructure. So some of the higher costs, not all, but some of them should have an offsetting positive value implication. We are undertaking that review, as I indicated, and we'll give more quantitative guidance once we've completed that process. But as we indicated, we do expect increases from our previous guidance in a number of areas, including pressing infrastructure works, partly due to the New South Wales planning approval requirements as well as transport for New South Wales road design requirements on Moorebank Avenue works as well as third-party services such as siler main relocations and water services, and we currently expect the IMEX automation will also cost more than previously indicated. But we'll provide more definitive numbers on that, as I said, once that process is complete. In summary, though, we're very, very pleased, as Maurice indicated, to finally conclude this transaction with Woolworths. We think they're an ideal party for the site and will be a catalyst for further positive progress and the continued success of the project. With that, we're happy to take any questions.

[Operator Instructions] Your first question comes from Matt Ryan with UBS.

A question on the potential logistics revenue that might come from Woolworths. Just curious on, I guess, what discussions that you might have had so far, and whether that sort of expected number of TEUs or whatever metric that you want to use is sort of in line with the stated objectives that you've put forward in the past for Moorebank.

Yes. Look, there hasn't been specific discussions. Obviously, from a Qube perspective, they are an existing customer of ours. So obviously, the opportunity to grow volumes with what they're investing, what Woolworths is investing in is significant. We haven't been a party to their detailed analysis of the volume that they expect to get through their facilities. Obviously, they're very sensitive about divulging some of those details. We have a view, but -- and clearly, the opportunity to consolidate their operations from, as I said, 2 facilities. And I think in total, what we understand is that Woolworths is reducing their warehouse footprint from 170,000 square meters or thereabouts to 75,000 square meters. So clearly, they are expecting significant higher volumes through that footprint. So look, we're not in a position to quantify anything at this point in time. But obviously, very, very comfortable with the fact that it will generate in its own right, considerable volumes in the logistics space. It is fair to say, though, that the regional DC in its own right does not generate -- is not expected to generate significant IMEX volume. But I suppose, if you like, there's a bit of a trade-off there for us in the context that having both the facilities there really drives the opportunity for us to secure other tenancies with suppliers, who will supply into that our regional DC, not through the national DC, if you like.

I guess that was going to be my other question. Just thinking through what the signing does for your ability to sign more tenants. And maybe you can just make some comments on what you think the interest is like out there at the moment for Moorebank.

Look, generally, the interest has been reasonably good. I think it has been a little difficult for us because we had agreed with Woolworths, and Woolworths was very insistent that the deal remain confidential. We have been talking to other parties. We were able to sort of signal that there -- we think there's advantages for them to be there. So I would expect that we will ramp up those discussions now that we've got this announcement today and confirmation today. In their own right, we have been talking to other suppliers to them. But I think, today, we'll register with them the significance of the opportunity going forward. I think the other point that I'd probably make is maybe preempting a few other questions. Look, in rough terms, the area that will be occupied by Woolworths represents about 15% of the total developable -- warehouse developable area on Moorebank. And the new facilities on the East side, so not the existing warehouses, exclude them, but the new warehouses represents similarly about 15%. So it does represent roughly 30% today of the available developable land having new facilities on it, and that's in the context of the total site being equivalent to the size of the CBD in Sydney.

Your next question comes from Jakob Cakarnis with Citi.

Maybe to ask Matt's question in a different way. So the expectation maybe that you could get to for Woolworths just in terms of run rate on TEUs, do you guys have a view as to whether or not that would be enough to replace the target Qube Logistics, which you said you've combined around 100,000 TEUs to just underwrite that volume coming off the port? Is there a different way that you'd like us to think about that? Or is there any further commentary that you'd like to make about that view?

No. Look, I think, as Maurice said, it's really going to depend on ports. I mean, clearly, they're a major importer in their own rights. So we'd expect reasonable volumes, but it's just too early to put a number on that.

Is there a better way to think about the risks of potentially Target pulling out and Woolworths going in? Could that be an offsetting factor?

Okay. Look, we've got no indication whatsoever about Target pulling out. The comment I'll make in respect to Target is that we understand from Target that the investment into that warehouse has exceeded the expectations of Target in terms of efficiencies and delivery. We also are fully aware that other entities in the Wesfarmers Group have shown an interest. And so we have a lease with Target. We don't see that changing for the term of the lease. And in fact, we see the opportunity that it could well be enhanced Target by the use of that facility by other members of the Wesfarmers Group going forward.

Okay. And then just a clarifying question. I think, Maurice, you mentioned that that $30 million will be primarily rental earnings. Is there any reason why the rent per square meter would be higher relative to what we'd see for other industrial warehouses almost double out in Western Sydney? Is there any particular, I guess, characteristics of the site that would make it much different to market on a per square meter basis?

Look, I think the way we've looked at it is we've reached a commercial agreement with Woolworths. I think as I alluded to at the start, in our view, it validates our strategy and our vision that there are significant supply chain savings by being at Moorebank. That's clearly part of their investment case. And we have always had the view that as we develop out Moorebank, we'll make future commitments to tenants at Moorebank, that there will be a degree of fear of missing out, if you like. We've discussed it, I think, with most of you in the past. And at some point, that's going to drive what we think is certainly above-market rentals on a -- when compared with an individual industrial development on a specific site with none of the supply chain benefits of Moorebank.

Yes. Okay. One final one for me. How should we think about the returns on CapEx moving forward out of Moorebank specifically? It looks as though this is coming out around 7%. Given the CapEx that you guys have to put in, how do we think about incremental CapEx and returns on CapEx from here?

Yes. Look, I think, obviously, every tenant's going to be different based on the discussions. So I think as Maurice indicated, we would think that rents should be going up from here and incentives reducing given, I think, we've now got a key anchor tenant. The other tenants will get significant benefits. And therefore, Brent should be going up on capital. But I think it's also important to understand, in looking at the returns, obviously, we've got investment in the land. So the land we own and we're investing in the infrastructure. So the return can't be looked at only on the incremental CapEx, but on the whole project.

Your next question comes from Anthony Moulder with Jefferies.

If I can start with the volume that you do for Woolworths currently that goes into Yennora. But are you doing any of the facility or any of the deliveries into their facility down in Melbourne, Mulgrave?

No, no. So we have a facility at Victoria dock in Melbourne, a warehouse. Anthony, you probably remember we built about 5 years ago or 6 years ago. And that's the Yennora equivalent. In a way, that's the import products go from the port into that facility at Victoria Dock. And then we would deliver that, some of that product, yes, into Mulgrave is my understanding.

So effectively, you're taking volume your Victorian business and increasing the volume through your New South Wales business?

Not a lot. We don't do the whole lot into that regional DC in Melbourne and Mulgrave. No, we don't do a lot of volume. We do some.

That's the national DC at Mulgrave?

Yes. Sorry. Yes.

And I guess, this will get picked over a little bit. The $30 million revenue, it's -- I get it that it's based on the CapEx profile. The CapEx profile is based on the cost of the sheds and everything else. I think there are some support staff that are relocating to your facility or the Woolworths facility within Moorebank. But if I look at the Target facility, also very highly automated, but probably half the size of what Woolworths are building, but at 1/10 of a cost, where is all the additional costs going in, given that high-cost store, the automation that went into the Target facility? Arguably, there's a lot of automation going into the Woolworths facility, but how do we get to the differential between the costs of Target versus what's being built for Woolworths?

Look, in summary, Anthony, the Target warehouse is what I'd describe as being closer to a box warehouse, a traditional warehouse that they put -- there were some modifications for some clear spans and things like that. But the difference for Target and Woolworths is quite significant in the degree of automation. So Target's facilities were really automated scanners. So cartons came out of a container with a label on it. They're scanned. They then go down sortations equipment and then palletized manually for delivery to store. You contrast that with Woolworths if you take the regional DC receiving pallet loads from suppliers. And then this facility is twice or close to twice the height of the Target facility. It has multiple levels with inside that. So floors where pallets are automatically moved, broken down by robots. Product -- these pallets can be stored in the high-value warehouse that's 40 meters high, all automated by automating movements by robots. And then from those storage facilities, the pallets are broken down. They're broken down into carton or individual sizes and components. They're then stored again. And then the robots make up a new pallet for delivery to store, and then they move to be loaded on the truck by automated equipment inside the warehouse. And the only manual operation at the end is loading it into the back of the truck. So it's a significantly enhanced automated warehouse compared to an automated scanning and sortation system at Target.

And I guess that goes to the $400 per square meter sort of range, if that's what we get to. So I guess the question on from that is there's only going to be a select number of retailers, importers, et cetera, that would invest that kind of money into automation. Is that fair that the majority of the customers that will go into Moorebank from here are going to be towards the -- albeit a higher level of rent per square meter going forward, but more in keeping with some of the numbers that are already out in the Southwest of Sydney, West of Sydney kind of pricing?

Look, it's a bit of a balance, I think. It's hard to know the degree of automation that's being looked at. I know suppliers to Woolworths are looking at automation of their own facilities, different type of automation to what's in Woolworths because of the requirement of Woolworths to deliver the store. I think that's why you would notice that the national DC Woolworths, say, is semi automated. It's not fully automated like the regional DC. So we would see the opportunity for other tenants that have what I call semi-automated, not the full -- unless we're successful with another major retailer that might want to move down the fully automated way. But in the context of suppliers, I would think there's the opportunity from what you would call the traditional warehouse up to a range of a semi-automated-type warehouse. That will then obviously depend. And I think we've been talking about this for a couple of years on the particular circumstances for that potential tenant around what are their logistics supply chain requirements, what's imported, what's domestic, what's -- how it all fits together and then their investment proposals. But there's no question that, I think, as we've been talking about again for a couple of years, that automation is changing the warehouse designs and the capital costs of warehouses, and this is clearly evident by the announcement today.

Right. I guess, that's also driving down people's requirement of floor space. So to replace 850,000 square meters of warehouse space elsewhere in the Sydney Basin, it's potentially -- there's going to be a lot of additional warehouse space left empty.

Well, maybe, Anthony, but -- I think that there's increasing demand. But I think the other point that we've made is that it's not easy. In fact, it's -- I'll start -- I live there. It's not easy at all to retrofit an existing facility with semi-automation.

Your next question comes from Cameron McDonald with E&P.

A couple of questions from me. Just in terms of -- Maurice, I appreciate the complexity of the warehouses that you've described has gotten more and more complex. If we have a look at the original plan of 850,000 square meters of warehousing and 243 hectares of site, the sort of the utilization of the site only should, on average, be sort of 35%. If we look at this deal, the utilization on the 26 hectares is sort of under 30%. What's driving the sort of -- what are they doing with the excess land of the 26 hectares? And why would the utilization be less than the average when, presumably, the site as a whole has got more shared infrastructure for all tenants?

Yes. Look, the question around the extra land is a requirement of Woolworths is to ensure that they can stage both incoming truck movements that might come from suppliers, but also staging deliveries to stores. So it's consuming quite a large amount of land for the activities around connecting road transport requirements for Woolworths. Just Cameron, going back to your first question. When you're looking at ratios, and I acknowledge -- we acknowledge that this isn't the right ratio. And that's what I've tried to describe before of what was in the initial model, what you do need to do, though, on the numbers you quoted is you need to deduct the area that's been allocated in that 240 hectares to the rail terminals, both the IMEX terminals and the interstate terminals. So if you deduct that, you're somewhere around 170, 180, around that mark, hectares of warehouse developable land.

Okay. And then what are your plans with Yennora once they exit?

Look, we've got 3 or 4 years to work through that. We haven't made a decision on what we'll do there. I have no doubt between sort of in that last 12 months, we will consider our options. Clearly, if there's an opportunity to backfill with another operator, another customer through that, that might drive decisions. Too early, Cameron, to be honest, to be -- to decide on that.

And my last question is just to the Northern sort of section of the Western precinct. You'd also identified previously that there was another area under negotiation. What's the status of that?

That one hasn't proceeded at this stage. So we -- look, we're talking to -- obviously talking to a number of parties around those facilities. But the specific one, I think, you're talking about, that hasn't proceeded.

Any particular reason that they've decided not to proceed?

Look, they made a commercial decision. I don't think -- I think it's fair to say, in no way, does their decision undermine the strategy and the validity of Moorebank. It was a tenant, a potential tenant that is -- fair to say, probably didn't meet all of the supply chain requirements. The -- so it wasn't a big importer in their own right. Therefore, not a big user of the IMEX and the supply chains in Port Botany.

Your next question comes from Ben Brayshaw with JPMorgan.

Maurice, actually, my questions have been answered. I've got no further questions.

That's good. Thanks. No problem.

Your next question comes from Owen Birrell with Goldman Sachs.

Yes. I just want to just confirm with regards to, I guess, possible future tenants on that Western flank. In your 2019 presentation, there were 2 allotments of 150,000 square meters. Can I just confirm that you said at the start that they were both Woolworths?

Yes. Yes. One was in the middle on the plan, and one was to the south, the Southern -- the reservation agreement, yes.

Yes. And can I just ask? That southern position, that was the original one that they took the option over. What was the decision -- why did they decide to shift from that allotment to something more central?

Look, there's a few reasons. But the main issue or the main driver is the advantages of both facilities being side-by-side. And as I touched on, their design is to have them interconnected above the ground, I think at about the second or third story level, interconnected between the 2 with automated transfer of pallets between each facility. And so it was a co-location for them.

Right. So you're saying that previously, they were going to take one site for the regional center and the other site for the national center?

Originally, the reservation agreement at the very Southern end on the West side was a renovation agreement for the national distribution center, okay? And then they became a proposal from them for the regional DC. And we, in conjunction with them, decided that was better positioned in the middle of the site. And -- but it was early days in the negotiation. So it was not appropriate at that point to shift the reservation agreement because that was still live, the reservation agreement for the NDC.

Right. And perhaps, with the $30 million per year in revenue, that's -- I think you said that's purely lease revenue. Is there any, I guess, IMEX costs or anything that's incorporated within that? Or are they going to be paying for the use of the IMEX terminal and interstate terminal if and when they use it.

There's purely lease rent associated with it, and there'll be outgoings on top of that.

Excellent. Okay. And just finally, in terms of the way that you'll be accounting for this development. Can I just confirm that you'll be capitalizing the interest costs associated with the development? Or is that going to be expensed?

No. So during the construction period, the warehouse will be capitalized. And then once it's operational, it will be expensed.

Your next question comes from Paul Butler with Crédit Suisse.

Maurice and Paul, congratulations on getting this deal done. We've been waiting for a little while.

So have we.

I just wanted to come back to the question you had before around the coverage ratio being lower. And I understand the answer you gave previously on that. Does -- are you able to have a higher cut coverage ratio on the remaining space allocated for the warehouse, so that you still get to the 850,000 square meters? Or does it mean that the total warehousing space likely will be less than that number?

Look, theoretically, from a planning perspective, yes, but it depends on specific warehouses. So it will be challenging to get to the 550,000. But at the end of the day, for us, it's more around value. So if you look at it from a value perspective, we think this deal is sort of incrementally value-accretive relative to a generic warehouse that was better utilization, if you like. But ultimately, from us, it's really about maximizing the overall site value, which includes maximizing the utilization. But we'd rather have quality tenants and long-term leases even if it's not the ideal metric from land to warehousing ratio.

Okay. And the -- your contribution to the funding costs, you've given that range of $420 million to $460 million, but then I think you also said there's a cap. Would I be right in thinking that the cap is above the $460 million level?

Yes, including our cost of financing, yes, but not materially.

Okay. And then just on the -- I know you had this question before about how much Woolworths is going to be using the IMEX and shipping to and from or so importing via Botany. But can you give us a sense of what you think they'll be doing in, I don't know, in terms of what proportion of goods that are being going through the facility that are going to be imported via Botany?

Look, I can't give you quantitative figures on that at this stage. I mean on the national DC, a high proportion of volume will be imported, very high. And that is effectively their import facility. It's not to say that they won't accept vehicles bringing product in from third parties into that. But generally, the rule of thumb that we've been working through is that the national DC will have a high proportion of imports, and the regional DC would have a low proportion of imports. But that's what we've been discussing previously is, ideally, now, if we can secure some suppliers to Woolworths, then they will be importers in their own right and then supply into that regional DC without having to put a truck on the road, as they're doing today from their own warehouses. So the other point I would make is that we're not party to, as I said earlier, Woolworths' supply chain modeling and all of the work that they're doing in that context. And they, as you would know, the first regional DC was in Melbourne. And that's really going through still a growth phase. I think, as I understand, it's achieved their initial targets. But they would expect to be optimizing their operations and increasing their throughput through every square meter of warehouse land that they've got. So I would expect that it's not going to be a static number anyway what they start with in terms of volumes through the facilities. I'm sure they'll be targeting higher volumes going forward.

Yes. And I just wonder if you could also comment. You've told us that Woolworths is reducing their required warehousing space for this activity from 170 square meters down to -- or, sorry, 170,000 square meters down to the 75,000 square meters. Is that indicative of what we should be expecting of how logistics or automation is changing what's actually required?

I think it's fair to say that represents sort of, not necessarily the numbers, but certainly the decision represents the change that's happening in logistics and warehousing. Having said that, I think Woolworths is certainly at the forefront of automating warehouses like they're proposing, like they've done in Melbourne and what they're proposing for the regional DC here. So they're clearly at the footprint -- at the forefront of that -- of those challenges that are happening. And I'm not an expert in warehousing and what our other competitors to them are doing, but they're certainly, from what I understand, at the forefront.

Your next question comes from Rob Koh with MS.

Congratulations on the deal. So just some minor more modeling questions from me. So you've mentioned that the leasing revenues started at commissioning of these warehouses. Is there any prospect of partial openings and soft openings and things like that get a bit of revenue in the door a bit early?

No, when each one opens. So it's not -- they don't both have to be operational before we start getting revenue. As each one opens, we start to get rent.

All right. So it's just a big 1-2 hit as they open. Yes. Got it. Cool. And then as you've mentioned, the prospect of getting in some of Woolworths' suppliers in next to the RDC sounds very attractive. Is that is something that Woolworths has like some say in, given that they're obviously very keen to integrate their supply chain? Or is that something that you guys can just do as part of your commercial operations?

Yes. Look, it's their commercial call. I mean, clearly, they're keen on the opportunities of getting suppliers there. There's no commercial agreements in place whatsoever in relation to that. So it's really our call on how we go forward. That's been important to us because we needed, in our view, to control who the tenant is and the type of tenant that we do put to Moorebank in the future.

Yes. But clearly, that'd be a beneficiary. So that would be supportive of if we're able to do that.

And look, it is fair to say that the teams -- the Qube team and the Woolworths team will be working very closely together as we go forward. And we'll be sharing information with them, and they've been very open to work with us on those opportunities.

Yes, yes. Sounds very sensible commercial partnership style. That's all good. All right. And then just for Paul's big job over the next fees of funding all of this, and thanks for giving us the options, but, again, just does Woolworths have any kind of change of control or preemptive right over the financing side of it?

No.

Your next question comes from Darren Leung with Macquarie.

I just wanted to explore a few other topics in a bit more detail. So on the construction costs, you mentioned you include development management, capitalized interest costs during building and construction of the building. And I imagine that's the slab, plus the exterior. But just keen to understand how much of that represents the $460 million and how much are you contributing towards Woolworths', I suppose, internal fit-out, whether it's high bay or the on automation, please.

Yes. Nothing. So as we indicated, Woolworths are entirely funding the fit-out internally in the automation. Our capital is entirely for the external fit-out.

And the majority of that $460 million is the construction build costs, as you said, the foundations, the slab, the building itself, the structure, the roof, et cetera. So -- and as I said, it's on multiple levels. So it's quite a complex design with significant foundation requirements. So as I said, majority -- by far, the large majority of that $460 million is construction cost.

And just to be clear, it's sort of similar to the rent question earlier. It's almost sort of double what a standard warehouse of this size would cost, dollar per square meter. So I mean, is it seriously just the foundations that's causing the uplift in construction costs?

And the fact that it's twice the height. So it's somewhere in the order of 40 to 42 meters high. It's a significant structure in its own right. Then the other important structures, the other important component is particularly in the RDC. For those familiar with what they've built in Melbourne, the reason it's 42 meters high is that pallets are stored up to that height. And so in automation mode, there's very small tolerances on movement or shifting or subsidence of the building to accommodate automation within it. So yes, it does seem high, but that is the reality. It's twice the cost of a traditional warehouse being that high with multiple stories inside it.

What price are you paying Woolworths for the development management agreement?

Well, we're not paying them the price. It's just the commercial arrangements where they're managing it because it's their warehouse. So we're not taking the risk on that. And then we've got that payment agreement with appropriate returns for us built in, which is the rent figure. That's just one commercial arrangement that nets out as...

So there's a development management agreement and a lease agreement for each facility.

But we're not paying in the sense...

There's no fees either way that come out of that development management agreement.

Okay. Understand. And then the second one is on your rent per square meter, ends up being like $400 a square meter, I think, it got asked earlier, and your response was significant supply chain savings. I mean, I imagine -- I don't cover Woolworths, but I imagine they would also be looking for significant rental savings. So the obvious question to ask is, were there not any competitors at $200 a square meter that Woolworths kind of considered?

Again, as Maurice said, to find a site where you can build 2 automated warehouses next to each other at this scale and have the logistics benefit of near rail, new major road networks, there was no other site. I think they've put their announcement or their call that they looked around Australia, and there was no other site like this. So that will generate significant savings from warehouse consolidation all the other factors. So I think they obviously view it as a good value, and we need to obviously get an acceptable return for our shareholders.

Yes. No. Good. And then the third one I had was you mentioned why the funding options was the property stream. So I imagine that's shuttering off these 2 sites in isolation. The 3 parts to this question is, one, how easy and quickly can you achieve that? And then the second one is, given what the market's done on COVID-19, et cetera, what do you think an appropriate market price or cap rate is?

Yes. I guess, on the first one, we're not -- the base case is not disciplined to these properties. It's totally broader monetization process that we talked about, which covers both the developed warehouses and warehouses under development as well as the developable land. So that price is continuing. There's no question, this will be very valuable for that process, but it's only a part of it. We're not looking to break up the site, as we've always said. We may look at that down the track as an option, but it's certainly not something we're doing now in terms of what cap rates, a 20-year Woolworths lease like this. I mean, ultimately, that's up to parties how -- there's no question. We think it's a very valuable agreement to have someone of that quality counterparty for a long-term lease. But time will tell what that equates to in value.

[Operator Instructions] Your next question comes from Nathan Lead with Morgans.

Congrats again on the deal being announced. Just 3 questions from me. So first up, can you sort of have an estimate of what the land value in the precinct enabling CapEx is that you sort of allocated against the land that Woolworths is going to be in?

We haven't broken them down. I mean, we're having, for accounting purposes, a valuation done as we speak. But ultimately, given the monetization process, I don't think it's really appropriate to give a value.

Okay. The average, is that captured within the CapEx estimate that you've squared out?

Yes, part of that range. That's correct.

Yes. Okay. Great. And then just final one for me. Just sort of thinking, I suppose, about tax leakage from the projects. How should we be thinking about the sort of the income tax profile? Is it going be tax or -- sorry, a trust or a company structure? Maybe if you can just sort of talk through how much tax is going to get paid away out of it?

Yes. Look, at the moment, it's part of the Qube's tax consolidated group. So it's taxes as a company effectively through our consolidated group. If we go on the monetization part, that may change. But you should just think that effectively, the income will be fully accessible, less whatever tax depreciation benefits we get from the warehousing and the other part of that project.

And fair to assume to the 40-year straight-line on the CapEx pool?

Again, obviously, we're working through that. But given it's not being built, but yes, that's pretty reasonable.

I think if we can, we'd like to just round it up. We've had an hour. If there's any final questions.

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

Look, just in closing. Thanks, everybody. I realized it's late in the afternoon. Appreciate you joining the call. And just as I said at the outset, we're obviously very extremely pleased with the decision and the announcement today. Thanks very much, everybody. Bye.

Thank you.