Stoneweg Europe Stapled Trust (SET.SI) Q3 FY2025 Earnings Call Transcript & Summary

Good morning, and welcome to the Stoneweg Europe Stapled Trust Third Quarter Business Update. We will begin with remarks from the CEO of the Manager, Simon Garing, followed by Q&A. [Operator Instructions] Now I will hand across to the CEO of the Manager of the Stoneweg Europe Stapled Trust, Simon Garing. Simon, over to you.

Thanks, Kara, and good morning, and thank you for joining us today for the Stoneweg Europe Stapled Trust or SERT for short, our third quarter briefing for this year. The photo montage highlights a selection of SERT's assets, typically large, well-located Logistics and Light Industrial properties and Grade A office buildings. These range from core to value-add type, demonstrating our barbell approach to portfolio construction. We continue to execute on our stated investment strategy of pivoting further to logistics and data centers. We are focused on core Western European markets and the Nordics, which together represent 86% of our current portfolio. As a reminder, almost 93% of SERT's portfolio is held under freehold title and nearly all leases feature inflation-linked rent escalators or indexation, supporting steady annual income growth. So we announced a couple of months ago that we continue our pivot towards the Logistics, Light Industrial and Data Centers now targeting to be 70% by 2027. We plan to achieve this through further divestments of office and other assets and through reinvestments into logistics, while the investment in AiOnX, our data center development fund will also grow through the development cycle. We will also move to a greater weighting to Western Europe and concentrate in our existing key gateway cities, plus we continue to review our sponsors' pipeline in Switzerland and Spain. So why is this pivot important? Well, industrial REITs generate higher cash flow per dollar of investment than office buildings. Cap rates tend to be higher and generating higher distribution yields, supported by a number of key themes in logistics of e-commerce, digital infrastructure demand and onshoring of supply chains reflected in the higher multiples to NAV on the stock market. So underpinning SERT's strong asset quality is the strength of our tenant roster with around 800 tenant customers and more than 1,000 leases with a long WALE of over 5 years. The top 10 tenant customers account for only 20% of the total headline rent with no single tenant exceeding 4%. This limits concentration risk across almost 1.7 million square meters of NLA. And over 90% of our tenants are large multinationals or government-related entities, providing a strong credit profile during periods of economic uncertainty, and that's reflected in our low levels of arrears and high cash collection rates. The portfolio is assessed to be approximately 7% under-rented to today's market rents by our recent valuations and underlying market rent growth is evident in both logistics and office markets, supporting recent valuation uplifts. So Page 6 highlights some of the key awards in the third quarter, including 2 awards at the latest ASEAN Corporate Governance Awards, both being nominated as a Top 5 Publicly Listed Company in Singapore and within the Top 50 in all of ASEAN. We also achieved a GRESB 4-star rating for the third consecutive year and 85 points from GRESB, and we also hold an MSCI ESG A rating, one of the few in Singapore to do so. So now on to the third quarter financial and operating performance highlights. The portfolio results are outstanding in a benign environment. Like-for-like NPI continued to grow at 5.9% for the 3 months, driven by a 7.6% positive rent reversion, almost equal to the 11% that we've demonstrated over the full year. We also, in the quarter, lifted occupancy 110 basis points to 93.5%, combined with substantial 97,000 square meters of leasing, which is around 5% of the total portfolio in 1 quarter. This continued our trend of improving financials. The year-to-date decline in distributable income is now only 4.6% lower than PCP after this very strong third quarter, which reflects the negative headwinds from the previous higher financing costs now being behind us. And with our unit buyback recently, the decline in DPU will be even less than the decline in the overall distribution income being less units on issue. We are also pleased to announce that Fitch during the quarter raised its credit rating on SERT to BBB with a stable outlook which enabled us to reset SERT's debt for a longer duration and lower costs. I will present a slide shortly that will show the fortress state of our balance sheet, including an almost 6-year weighted average debt duration. We will also close on EUR 105 million of asset sales imminently, which will reduce gearing to 39.1% from which we will commence to reinvest modestly in 2026. These recent sales complete the EUR 400 million sales program that we started out in 2022. And I'm pleased we were able to achieve these sales in total at an 11% premium to their valuations, crystallizing over EUR 41 million of gains. Slide 8 shows the pickup in the portfolio occupancy due to this active leasing in the quarter and the disposal of a higher-risk asset in Gdansk in Poland during the period, again, at a slight premium to book value. The long WALE of 5.1 years continues to provide cash flow resilience and visibility. And we've already derisked over 70% of the leases expiring until March next year, again, providing us very good visibility into 2026. The next slide provides the key highlights from Fitch's recent rating upgrade report. Fitch pointed to the improving quality of the portfolio from recycling assets into our AEIs and the steady leverage with sufficient headroom on Fitch's financial KPIs such as leverage and interest cover. So this is the prime chart of today's presentation. We've undertaken a remarkable amount of refinancing on the back of the recent investment-grade upgrade to deliver tangible future benefits to SERT. This chart reflects our new pro forma debt profile following the imminent asset sales and our recent refinancing activities. So firstly, we have no debt maturing until 2030, no debt maturing until 2030. Following the successful EUR 300 million 7-year green bond in October and the refinancing of all of our '26 and '27 expiries and this was done also with 2 new bank facilities. One is secured against Haagse Poort development project. And the second is an unsecured loan extension for 5 years, previously maturing in '26, which has now got credit committee approval and is in final stages of documentation, which we will complete again shortly. And this is taken into account in this chart. Secondly, we have entered into a 5-year fixed to floating swap on EUR 300 million to take advantage of the lower ECB rates. We now have 56% of SERT's debt exposed to fixed rates, down from 86% in June, enabling SERT to benefit from further potential rate cuts, while any upside risk to rates is protected with interest caps that we've acquired to protect us on the upside for the next 2 years against this floating debt profile. So overall, our capital management of recent months will deliver 30 to 40 basis point savings in margins and lower finance costs in the following years. As an example, the 2033 green bond was issued at a 20 basis point lower margin than the 2031 bond that we did in January and with 2 more years longer duration, while the new bank loan margins are materially lower to the previous margins of the facilities that they are replacing. So again, fortress shape. In June, SERT made a strategic EUR 50 million investment in AiOnX, representing a 6.7% stake in our sponsor's Pan-European Data Center Development Fund. This fund has already secured 1.446 gigawatts or 1,446 megawatts of capacity across 5 projects with a clear path to expand to approximately 2 gigawatts over the coming period. Construction has already commenced in Dublin for the first 32-megawatt data center, which is fully pre-leased to a major U.S. hyperscaler. This underscores both the quality of the counterparties and the immediate commercial traction of the platform. I'm also pleased to say that the other 4 sites have made positive progress in the various stages of their development processes. For example, the Madrid site is on track to secure the planning permission, while Varde in Denmark, Milan and Cambridge sites have all successfully secured the full target power capacity. Collectively, these 5 sites position AiOnX as one of Europe's most significant hyperscale data center development platforms with distinct early mover advantages given that this fund has been together for 4 or 5 years already to achieve significant value accretion on these development programs. Construction loan facilities have also been arranged for each project subject to pre-leasing. So we -- again, we don't expect much equity required from SERT will be needed to fund these projects. As SERT is the only Singapore REIT to provide investors with material data center developments, we thought today we would provide analysts and investors with some general industry rules of thumb to assist you to understand the current potential. Slide 12 shows an example for potential returns on developments in Europe. According to our independent valuation report from JLL as of May as well as other industry benchmarks and public presentations from European developers, the net gross development value for modern European data centers is estimated to be approximately EUR 18 million per megawatt of IT power capacity. Against development costs of roughly EUR 11 million per megawatt of IT power capacity, this represents a valuation gain before tax and fees of roughly EUR 7 million per megawatt of IT capacity, delivering with approximately 1.5 million worth of rent per annum per megawatt, approximately 12% to 15% of net stabilized income yield on the development costs, 12% to 15% net stabilized income yield on development costs. And that represents a much higher yield than the valuation currently around that 5% to 5.5% yield level. That's what's driving the development profit. So assuming seed equity in this example of EUR 500 million, there is potential for over 10x equity multiple. And as a reminder, AiOnX will shortly have 2 gigawatts of power, of which we own 6.7% of currently. So I'm pleased to introduce you now to Hui Chen, our Head of Finance. Hui Chen is the woman behind the numbers managing SERT's accounts for the past 6 years. I will hand over now to Hui Chen to take you through our financial and capital management. Thank you.

Thank you, Simon. Good morning, everyone. I'm pleased to report that for the 9 months, our net property income was 3% higher than prior corresponding period, mainly due to higher income from certain assets such as Nervesa21 following the completion of its development. As Simon just mentioned, NPI on a like-for-like basis was EUR 5.2 million or 5.3% higher than prior corresponding period with Logistics/Light Industrial up by 7.3%, office up by 2.2% and other sector was 21.3% higher due to higher turnover rent received in Starhotels Grand Milan. Net interest cost was up 27% due to higher all-in interest rate of 3.9% for the period compared to a lower 3.22% in prior corresponding period. However, interest rate as of September was slightly lower at 3.93% compared to 3.97% in June. While unaudited distributable income is down 4.6% for the 9 months on prior corresponding period, this was a very strong quarter, helping to combat some of the larger declines in first half of 2025, which was down 7.3% on prior corresponding period. For third quarter, distributable income was up 17.2% as compared to second quarter due to rising rents and approximately EUR 2 million in one-off income. In October, we acquired an additional 2.1 million securities at an average price of EUR 1.51 per security, taking total securities in issue to 558 million. This is accretive to both distribution per security and NAV per security. Now turning to Slide 15. As at September 2025, SERT remain comfortably within all bond and loan facility covenants and within the credit rating agencies' metrics for an investment-grade rating. Interest coverage ratio is 3.1x on a trailing 12-month basis, calculated based on the definition in SERT's EMTN program. This is impacted by the normalization of interest rates, as mentioned earlier, but the ICR remains well above our covenants, rating metrics and MAS limits. Given all the refinancing activity over the past few weeks, Slide 15 also shows we expect net gearing to drop to 39.1% from imminent asset sales, which will partly be used to pay down the EUR 37 million drawn from the RCF. We have refinanced all of SERT's debt over the past 12 months on lower margins with substantially longer maturities. With an undrawn EUR 200 million RCF and additional EUR 50 million cash from asset sales, we have ample liquidity going into next year. We are comfortable with net gearing towards the top end of our range. We are pleased that our NAV remains above EUR 2.01 per security or EUR 2.16 per security as per EPRA's guidelines of adding back deferred capital gain tax, which can be typically passed on to the buyers in Europe and is not paid for by such security holders. Now I will pass to Elena to share key highlights about the portfolio and asset management.

Thanks, Hui Chen. Starting with the portfolio performance to date, the occupancy trend lines in the chart on the left show that overall occupancy increased 110 basis points over the past 3 months. This was mostly driven by leasing in Paris across our Dutch portfolio and the divestment of a weaker office asset in Gdansk that Simon mentioned earlier. Our core Western Europe portfolio's occupancy was 94.5%, thanks to strong leasing activity. Occupancy in Central Europe was at 88% with limited office leasing in the quarter. The chart on the right reflects the relative size of each country and amongst others, shows the lower materiality of Poland and Finland to the overall portfolio. Turning to the Logistics and Light Industrial sector specifically, portfolio occupancy was up 80 basis points to 95.2% over the quarter. This is very much in line with the target of 95% that we have set for ourselves for year-end. Turning to the third quarter specifically in more detail, we signed significant 93,000 square meters of leases, of which approximately 7.5 -- which represents approximately 7.5% of the Logistics and Light Industrial portfolio. This is on top of the 77,000 square meters of leases that were already secured in the first 6 months. In 3Q, we achieved 10.6% positive rent reversion with the year-to-date rent reversion positive at 9%. The logistics subsector have been stronger year-to-date with rent reversion at 11%, while the light industrial subsector was at 6.5%. Incentives in the sector are inching up but remain very low. Tenants are more inclined today to renew than to relocate on expiry as they seek to avoid costly relocation and new fit-out costs. The portfolio is still under-rented and valuers are estimating passing rates at about 6% below ERP. Turning to Slide 20. You can see here that according to a recent report by Savills, Germany and France are the top 2 markets where occupiers are expecting to take more space in the coming 3 months. Part of this demand will be driven by modernization programs. Important freight hubs and ports in Spain, Italy, Belgium and the Netherlands continue to attract more interest with Czechia benefiting from onshoring of supply chains. And all this bodes very well for our portfolio. Also from the same report on Slide 21, you can see that given the geopolitical volatility, defense spending in Europe is entering a new cycle as European states spend more on defense. As a result, manufacturing and logistics sectors are expected to expand significantly to support new defense supply chain. Savills estimates that Europe may need additional 37 million square meters of new space over the next 7 years, while U.K.'s demand could rise up to 3 million square meters. Lastly, on this sector, the key leases signed in the quarter were in Germany. The first one was a 10-year lease renewal to a single tenant for over 30,000 square meters in Sangerhausen at 28% positive rent reversion. The team also renewed a 12,000 square meter lease at one of our multi-let assets near Stuttgart at 11% positive rent reversion. Turning to the Office portfolio. Overall occupancy there rose by 200 basis points in the third quarter to 88.2%. The 6,500 square meters 10-year lease with a Danish tech company at Haagse Poort took effect in the third quarter, and this improved the let occupancy rate by 360 basis points. The recent divestment of our Gdansk office asset, which was less than 50% occupied, boosted the Polish portfolio occupancy by 360 basis points as well. In Finland, a lease expiry of 2,100 square meters in [ Muuratjarvi ] reduced the Finnish occupancy rate by 310 basis points to 70%. The Finnish portfolio is now yielding 10%, even as passing yields in our Finnish assets remained strong at over 8%. This gives us the flexibility to hold for medium-term exit at the best achievable price. In the first 9 months, office activity was approximately 77,000 square meters in leasing with most of the leasing or 73,000 square meters completed in the first half of the year. The year-to-date rent reversion achieved was 12.5%, 9.1% higher versus PCP. Other than the major new lease in Haagse Poort that took effect in 3Q, there was minimal office leasing in the quarter. Overall, the office portfolio remains 8% under rented. We continue to focus on securing long-term leases and higher rents, strengthening the portfolio's income profile over time. Broader European office sector trends are consistent with the trends observed in our portfolio. Recent CBRE data shows investor interest in CBD offices rising strongly, up between 29% and 47% year-on-year. This has been driven by healthier tenant demand, recovering occupancy and stable vacancy rates. Despite some uncertainty around U.S. tariffs, prime office yields have remained stable across markets with expectations for up to 25 basis points yield compression in 2025 in many European locations. Confidence is also returning to the lending market. Lenders are increasingly comfortable financing prime European office assets as reflected in lower all-in debt costs and higher LTV ratios, rising from the previous 50% to 60%. And for my last slide, before I hand over to Simon, while space in central location offices are still in high demand, the change in rental growth is moderating due to affordability constraints and increase in new supply. This shift results in asset owners redeveloping or repositioning older assets. Since 2022, SERT has divested over EUR 200 million in noncore assets. Simon, over back to you.

Thanks, Elena, and it would be remiss of me also not to congratulate you on this call for your recent promotion to Chief Capital Markets Officer and Investor Relations, and you couldn't have started your new gig with such success. So congratulations again. So turning to our strategic priorities for the short to medium term. So firstly, we continue to enhance the portfolio and pivot to the 70% target of Logistics, Light Industrial and Data Centers. Our local Stoneweg teams are actively managing the assets to retain high KPIs across the portfolio, including delivering strong NPI growth from high rent reversion and indexation. We continue to drive occupancy higher and maintain long-term lease duration for earnings visibility and resilience to support the higher DPU currently of 8.5%. Secondly, we are focused on our balance sheet strength. With almost 6 years of WADE and stable asset value, we are comfortable to be at 40% net gearing over the medium term. We continue to selectively sell non-core assets to maximize value and reduce risk in the portfolio and provide liquidity to build our AEI and development programs. The rating agencies reflect well on our capital management strengths and track record with Fitch's recent rating upgrade, a rare outcome in this benign macro climate. Thirdly, our recent EUR 50 million investment into AiOnX via the new business trust is designed to provide you, the investors, with substantial gains to complement the REIT's stable and resilient yield. We have shown you industry rules of thumb to help you bridge to the substantial equity multiple potentials and capital gains on this investment based on today's environment. We are making good progress also with planning approvals for our 2 major Dutch projects. So in conclusion, this year has been a very successful transition year from Cromwell to Stoneweg. We have continued to put in place the building blocks for future DPU and NAV growth and to drive overall returns for investors. I'm most pleased that we've also refinanced all of the debt in the last 12 months with lower cost and longer duration, benefiting from Stoneweg's European networks. So we are well positioned to deliver sustainable returns and long-term value for investors. Thank you for your investment and trust in us, the management team and the sponsor. So Kara, over to you to see if there are any questions. Thank you.

We will now begin our Q&A session. [Operator Instructions] Our first question comes from Joel.

Congratulations on your results and particularly your credit upgrade and debt activity. Yes. Okay. A couple of questions from me. The first question is on divestment. On your Slide 4, I understand there's some targeted reconstitution. This would be completed by end 2027. Is that correct?

The EUR 105 million that we've mentioned today is due imminently. That means weeks, not years.

Okay. So actually it's by 2027, but it could happen a lot sooner.

Yes. I mean we have to be careful. My compliance team is saying we have to be careful on forward guidance. But again, weeks, not years.

Okay. Got it. Got it. Because I was just wondering whether there's like other activity you plan to sell. I mean it looks like...

Yes. So look, there's 2 things, right? So there's 2 things. The first is we always recycle assets, okay? So as a very active asset management company, we like to add value to assets. And in some parts of that particular asset cycle, we've maximized the value for that asset. And we have a very thorough 13 risk factor matrix model that we assess each asset from a hold sale position. So if the expected returns have peaked and the risk is relatively benign, then that is an asset that we will sell to then potentially move that into other assets or other developments. So when we set out in 2022 with a EUR 400 million sales program, that was more targeted at the balance sheet during the rise in interest rates, which obviously caused the valuation cycle to turn. Now the ECB has been in rate cutting for the last 12 months, we are clearly seeing cap rates decline, and we're seeing valuations now start to increase. So we're pleased that we've now within weeks, completed that EUR 400 million sales program. So that's that large chunk of what we needed to do. Now over the next few years, there's always going to be some element of recycling. It's not going to be that material because we will phase it through our CapEx cycle. So for example, we have 2 development projects in the Netherlands, which we expect to kickstart next year. That totals around EUR 160 million to be invested over a 3-year development cycle. So you could imagine that there will be sort of EUR 30 million to EUR 40 million of asset sales over the next 3 years per annum to fund that more accretive and more value-enhancing development program. So 2-part answer to your question.

Great. Okay. Very comprehensive. I was just wondering because I saw that you have a hotel in Italy. Is that correct?

That's correct.

Yes. And I think it performed quite well recently. So it is -- I mean, comparing logistics and office and suddenly one small part there, what's the long-term thinking for this hotel?

Yes. So this was a legacy asset. At the time of the IPO when we bought -- we had 74 assets through a number of portfolios, including the Italian portfolio. In that Italian portfolio, it had a number of non-logistics, non-office buildings, including a tax office, police campus, which we've disposed of, but it also included an excellent 250-room hotel near Malpensa Airport, the main international airport of Italy. And that, as you've rightly highlighted, is performing exceptionally well. We have a fixed lease with the operator. And in that lease, we have turnover rent. And so that's what's been driving the other category. And I think Hui Chen mentioned that, that particular property is up, what, about 20%, 21% from an income perspective year-on-year. That does not mean, Joel, that we're going to go out and buy more hotels, if that's the inference to your question. We're very happy with this one. It's certainly not the strategy for the REITs to buy hotels, but we're very comfortable with this one at the moment.

Okay. My next question is on the DC fund. I understand it's quite early days, but when could we realistically see some payback or upstream in dividends?

So it's a 10-year life development fund. So at the end of the 10 years, there's a redemption mechanism. That's not to say that there's not dividends to come out of that fund prior to the 10 years. In fact, the first property will be completed in the next 18 months in Dublin, which we mentioned, 32 megawatts, which is almost EUR 600 million in value based on current valuations and providing a high yield. So I would not want to give you a forecast. Again, my compliance officer is in my ear. But we wanted to show on that chart that the capital gains potential is enormous. And even if the fund doesn't sell the assets and we own these assets into the long term, that's a 15% yield on cost. That would be very accretive, assuming we continue to own that portfolio into the long term. But at this stage, it's sitting in the business trust. We're not expecting it to provide a distribution. So again, we have the REIT with the 100 assets that will continue to drive the income that drives the [ EUR 0.13 ] distribution. And then the business trust, which has this development opportunity is really in the near term about driving capital gains. And then obviously, longer term, the cash flow will start to come in. But I'm not going to give guidance as to when that will be at this stage.

Okay. And the last question is on your under-rented properties. I think it's Slide 28. You mentioned about 8% of your properties remain under-rented.

No, it's the other way around, Joel. So all of our assets on average are 8% under-rented.

Average. Okay. I'm just wondering how far below market rents. Okay. Okay. I understand.

Some buildings may be 20% down, some might be 1% or 2% down, but on average. So how can I help you from a forecasting perspective? We are the only REIT that provides reversionary yields. What does that mean? That means the independent valuers' assessment of net property income in 4 to 5 years divided by today's valuation. So if the reversionary yield is higher than the initial yield, then that tells you that the valuers are forecasting lease by lease, building by building, substantially higher income growth. In our case, that's 15% to 16% higher than today's initial yield. So it's not our forecast, that's our valuers' forecast. And that takes into account the lease being under-rented, the view on market rent growth, the view on occupancy, vacancy, et cetera. So it's a very detailed path for you to understand the growth profile. We've flashed up here on the screen. It's in the appendix. Average reversion yield -- sorry, 7.8% versus initial yield of 6.3%, there in line with the 15% growth that I was talking about. And if we're sitting on today an 8.5% dividend yield, and we've locked in all of our debt for the next 5 years, this means that the growth from the income can then come -- property income can then come down to DPU.

Our next question comes from Dale.

Congrats on the results, and congrats to Elena on your promotion. Okay. Just a few quick questions from me. I think firstly, in terms of the financing cost, right? So I saw that in the quarter, you're saying that it moderated to about 3.8%. And given that you have no more refinancing in 2030, how should we be looking at your financing costs? You need to say that if the ECB continues cutting rates, it will probably only benefit your floating loans?

So we have deliberately reduced our fixed rate component, and we've put in place a EUR 300 million 5-year fixed to floating. So we are now only 56% fixed. So this is at the bottom end of the Board's policy range. Our Board policy, just to remind you, is to be at least 50% fixed. And so we were almost at that bottom. So to the extent that ECB cuts rates further, we have given investors far more exposure to that interest rate cut than we did prior to this recent capital management initiative. So we've improved that flexibility. Now having said that, we've also bought some caps so that if we're all wrong and the ECB has to lift rates, then we're protected at about -- depending on which stack we can take you through more detail, but it's roughly around where we are now. So we've given the downside benefits to investors and capping the upside risk.

Okay. So meaning to say that going forward, right, I mean, given that you've already experienced quite a fair bit of savings in interest costs to about 3.8%. Assuming all else remain constant, I think we should be expecting this kind of rates going forward for the next few years?

Yes. So some of these initiatives will take place or have taken place in the fourth quarter, so after the September results. So you'll still see some benefits continue to come through.

Okay. Okay. Sounds good. Okay. And my next question is on the divestments. You're saying that there's about EUR 105 million in divestments, right? If I'm not wrong, there is still that Polish office asset outstanding. Which are the other assets contributing to this EUR 105 million?

Yes. So we mentioned that the Polish asset actually settled in the third quarter at Gdansk in Poland. So that's now done and the cash has been received. That's been sold to a residential developer. The 2 major -- and sorry, and 2 days ago, we closed on EUR 11 million sale of one of our business parks in Italy, Agrate, which had announced earlier, but the actual cash has now come in, that's now closed. So our announcements tend to be at the time of close rather than the time of the agreement of the SPA. Some of our SPAs do require certain CPs and market norm condition precedents to be finalized. So we tend to be very conservative with our announcements. So rather than upfront, we tend to announce them at the back end where there's still some CPs. So we'll be able to say imminently exactly the details of the assets that are being sold. But just generally, if I can say, one of the sales is a portfolio sale. It's in a smaller market that we've been negotiating with this party for a little while on the back of some difference in views on risk in this particular market. So we'll be able to say more once that's closed. But we'll be looking to reinvest modestly these proceeds into Western European Logistics and Light Industrials. We have a number of options that we're currently reviewing. We understand that there is a transition period between selling a portfolio and reinvesting. And we'll obviously monitor that as we come into the February results from an impact on short-term impact, which is I think where you're going to ask next. So watch this space. But really, we want to derisk the portfolio, recycle the capital into higher and better use, both our own portfolio through the AEIs, plus taking advantage of our sponsor's pipeline. And I think that's something that's quite different under our current new sponsor than the old sponsor. We're dealing with a pan-European, very experienced European company in Stoneweg [ Icona ] and they have a lot of networks that we're able to take advantage of. And we're actually in quite a privileged position on the reinvestment side. So we'll do that modestly. And we'll also continue to look at buying our stock back at these low prices whenever there's an opportunity to do so.

Okay. But just wanted to follow up, Simon, you're saying this potential portfolio sale, I'm assuming it's an office portfolio.

Maybe not.

So it's a mix. Okay. And okay, my final --.

It's more a play on a region than it is on the asset type. So I wouldn't get too caught up on the asset type. It's more about the region. We want to make sure that we are clearly seen as a Western European core market REIT. So we're 86% weighted. We will be very shortly 90% weighted to Western Europe. We want to make that very clear.

Okay. Got it. Got it. Sorry, my final follow-up on this is any update on this Maxima? I think previously, there were talks about potentially redeveloping or selling the plans. How is that coming along?

Yes. So to Joel's point, Italy hotels have been very strong. The hotel market in Italy and other parts of Europe, such as Spain are performing exceptionally well unlike other hotel markets. So it may not be a surprise to you that being only 7 blocks from the Colosseum in Downtown Rome adjacent to the new train station that the value has improved significantly for a hotel conversion rather than for an office play. So we've obviously been trying to do an office pre-lease, but it's got to the point now where maybe someone else has seen better value in this project, converting it into a hotel. So again, watch this space. We will not be doing a hotel development, but that's certainly something that we've witnessed that the valuation on those sort of sites has materially improved for accommodation in some of these high tourist markets.

Our next question comes from Vijay.

First, congrats on a very good set of results. A couple of questions. In terms of this EUR 105 million divestment, this is on top of whatever you have divested for the year, right?

Correct. So this will take us to the EUR 400 million.

Okay. Okay. Can I get some clarity in terms of the EUR 2 million one-off income which you got during this quarter, where is this from? And if you strip off what would be the actual distribution growth?

Yes. So some of these one-offs actually were in the 6 months to June. So they're not prior year periods, they're prior intra-year. So in other words, that's quite difficult to answer your question because it doesn't go to changing the growth year-on-year. It just went to explain why the third quarter was up 17% relative to the June quarter. It's effectively -- so one of the items, for example, is service charge reconciliation. Another benefit was an adjustment on the EPRA amortization of a particular lease that was done earlier on this year. So what we wanted to make sure of was that you don't take the third quarter and just simply multiply it by 4 and say, we've got EUR 0.15 of distribution on an annualized basis. It's really take the EUR 2 million off, that's your underlying quarter, multiply that by 4, if you like, and then you get closer to sort of the run rate.

Yes, I got it. I'm just trying to understand what is this one-off income?

Well, like I said, so it's service charge reconciliation where we had a rebate from tenants and then secondly, from amortization of a lease that had incentives that we could reverse. There was also a small insurance claim as well that came through the loss of rent from a fire.

Okay. Can I know what's the cost of debt for the third quarter alone? And maybe based on the market conditions and market rates and your current hedging position, would you be able to give some guidance in terms of interest cost for '26?

The answer to the second question is no. Hui Chen, do you want to just explain a little bit on the September quarter cost of debt?

The September quarter cost of debt is around 3.9%. So we do not -- it has stabilized from the June quarter. So we do not expect any significant increase in the following quarters.

So what we can say is the margins are down. But as I explained to Dale, now we've gone to 56% fixed only. So to give you guidance into '26, we've given you more exposure to floating rates. So really, what is your view on ECB rate cuts, we can give you that optionality. Whereas when we were at 86% fixed, we didn't give investors optionality to interest rate cuts. The margins are down 40 basis points on our bank loans, and we've shown that the cost of the bond for 7 years, the margin is only 175 basis points. But the public debt markets were just too good for us not to tap after that Fitch rating. Back in January, our margin was 195 basis points for 5-year debt. Now it's 175 basis points for 7.5-year debt. That's very attractive for unsecured and really reflects the BBB investment-grade rating. So we took the advantage of sort of almost historical low spreads. I mean there was a small period in 2021 that was equal to this level. But if you pull out the [ Itrac's ] margins for real estate, you will see that the spreads really have compressed tightly in the last 6 months.

I agree. Just one last question. In terms of the channel mix, I mean, thanks for putting out the slide on that. What's your plans on this? Do you plan to further increase your stake -- your stake on this? Or is this a level which you're comfortable with?

Excuse me. So again, my compliance team in my ear saying, please don't answer too much of that question. Firstly, we are very comfortable with the EUR 50 million. We've shown you the sort of returns that can be generated on that EUR 50 million from a multiple perspective. So we don't have to make any further investments, and we will see substantial gains over that longer period of time. So I shouldn't have said we may see substantial gains over that long period of time. Now if there's other opportunities, we have a ROFR with our sponsors. So that's not to say down the track, we couldn't do something else. But at this stage, we are exceptionally comfortable with the EUR 50 million.

Thank you very much. We've had some text questions come through from our attendees. Our first question comes from CK, who asks, gearing is noted to come down to 39% by 2026. Do you expect it to remain at 39% beyond 2026?

CK, good question, and thank you. So firstly, gearing levels when valuations and income is expected to rise is a good thing. And so that's the cycle we're at. Secondly, what is the risk of debt? The risk of debt is a couple of fold. One is your ability to refinance if you take on too much debt and you don't have the right portfolio and you're in the wrong part of the cycle, then that has risk. What we've now announced is we've taken that risk out for the next 5 years. So there's no dramatic need for us to reduce our gearing from the current 40% level because from a risk perspective, we don't have debt maturing. The second aspect of debt is around interest cover. So it's not just about the LTV level. And so a lot of investors focus on LTV, and that's right to do so. But what is often overlooked is the ICR. This is the second covenant often you'll find in facilities. Now you'll note that many Singapore REITs have ICR coverage less than 2x at 40% leverage. Our ICR coverage at 40% leverage is over 3x. So we are double that of the MAS limits. So when we think about our risk, we then think about, okay, what's the risk of the ICR? Well, the risk could be that the income falls. Well, how does an income fall? Well, you may have a major lease expiry that you can't replace and therefore, you lose income. This is why I come back to the resilience of this portfolio. Our largest tenant only accounts for 3.8% of our rent. So even if the worst case, a number of our top tenants were not to renew, and by the way, we've just extended all but one of our top 10 tenants out for at least another 5 or 6 years, then you have some issues on the ICR. So we are very comfortable at this upper end of our policy range at 40% because the nature of our debt is very secure relative to the peer group. So we don't want to be hold up in this sort of basket of stocks that are highly geared because they're at 40% when you actually dig down into the debt, it's accretive for our equity investors. If our cost of debt is 3.8%, but our property yield is 6.3%, that is how we can generate high dividend yield. So if you think about that, if we trade at NAV like most logistics REITs do, our distribution can still be over 6% because we're generating the high return on equity, 6.3% yield funded by 40% gearing at less than 4%, gives you that high yield spread. This is why Europe is now attracting a substantial amount of foreign capital because there is a substantial yield spread, which debt actually enhances at the moment, the return on equity. So this is where we are in our cycle and in our thinking. I hope that helps explain a bit more color behind your question.

Thank you, Simon. That also answers a follow-up question for CK as well. Our next question comes from [ Wei San ], who asks, given the sharing by Simon that their refinancing has been done until 2030, sorry, can you clarify if the hedging profile for interest rates remains at 85% based on the first half presentation and management's current view on the hedging requirements going forward?

Yes, very good question. So if we go back to our chart that shows our hedging effective position, we've actually dropped that 85% down to 56%. Now we've got much longer duration debt. So the underlying debt is fixed. So you can see we've got EUR 800 million of our debt is in fixed term bonds at fixed rates. But the EUR 300 million bond, we've actually with a derivative converted that to the swap rate. So that's the difference between the 85% and the now 56%. The underlying debt is fixed. 80% of the underlying debt is fixed.

Thanks, Simon. Our next question comes from Aditya who asks, can you please share the possible time line for the EUR 105 million divestment? After these divestments executed, will we stop divestments as it has reached near the EUR 400 million divestment target?

Yes, weeks and correct.

Thank you. And a follow-up question from Aditya. After refinancing debt from divestment proceeds and new bond, will the previous interest rate collar and swap be retired early?

No. We'll leave them in place because we did not swap the RCF. So that is a floating facility. The facility lasts out to 2028. So no, we're not going to be reducing any of our derivatives. Just to give you some extra color, the Haagse Poort development loan as part of the terms with our Dutch bank, we have fixed that for the 5-year term with a cap and collar, I should say. So there is a floor to that at 1.25%. So if interest rates fall to 1.25%, we get the benefit. And if interest rates fall below 1.25%, then we have a floor.

Thank you. That does bring our Q&A session to a close. Simon, I'll hand back to you for any closing remarks.

Great. Thank you very much. And look, I'm glad a lot of the questions focused in on the balance sheet because it's now fortress-like. It's been an incredible journey over the last 6 to 9 months in terms of refinancing, particularly in the last month or so. So we've really taken care of all of the debt that was expiring over the next couple of years. Not only have we extended the duration to almost 6 years in the debt with no debt expiring until 2030, it's also enabled us to get interest rate savings of around 30 to 40 basis points on the previous facilities. But more importantly, overall, the portfolio continues to demonstrate very strong fundamentals, delivering almost 6% like-for-like NPI growth. And remember, that's an environment of very low GDP and inflation throughout the world. And secondly, we've been able to drive very strong rent reversion of over 7% while undertaking a substantial amount of leasing activity. So even though, again, the macro environment may be more benign, we've been able to undertake almost 8% of our Logistics portfolio to be re-leased in the last 3 months. So with that, we think the building blocks are in place for driving stronger unitholder returns over the coming period. So again, thank you very much for your attention and for your investment, and we look forward to catching up and speaking soon. Thank you.