The GPT Group (GPT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to The GPT Group 2022 Interim Results Briefing. [Operator Instructions] I would now like to hand the conference over to Bob Johnston, CEO and Managing Director. Please go ahead.

Good morning, everyone, and welcome to GPT's 2022 interim results briefing. I would like to start by acknowledging the traditional custodians of the lands on which our business and assets operate and pay my respects to elders past, present and emerging. Joining me for today's presentation are Anastasia Clarke, the group CFO; Martin Ritchie, our Head of Office; Chris Davis, Head of Logistics; and Chris Barnett, Head of Retail and Mixed-Use. I am pleased to report today that the group has delivered a strong result for the half, and we remain on track to deliver at the upper end of the guidance range we provided in February. FFO per security was up 9% on the prior period to $0.1704. The interim distribution of $0.127 is 4.5% lower than the prior period, largely as a result of an increase in leasing incentives as foreshadowed in February. NTA increased to $6.26 per security, which is up 2.8% on 31 December. Revaluation gains for both the logistics and retail portfolios were the main drivers of the NTA increase with the valuation of the office portfolio relatively unchanged since December. Valuation metrics for each of the sectors have not changed materially during the period with the NTA uplift driven by rental growth and development completions. The group delivered a 12-month total return of 10.8%, reflecting an FFO yield of 5.2% and a capital return of 5.6%. Portfolio occupancy currently sits at a healthy level of 97.5%. Our retail assets continue to see strong levels of customer visitations, and this is being reflected in positive tenant demand. Occupancy of the retail portfolio remains very strong at 99.3% and leasing spreads on expiry are continuing to improve. Leasing success during the period resulted in the occupancy of the logistics portfolio being maintained at close to 99%, while the office portfolio occupancy was slightly lower at 92%. Turning now to Slide 5. It has been an active period for the group as we continue to focus on our key priorities: growing the logistics portfolio through developments to deliver enhanced returns, lease-up of office space through focusing on changing customer needs, expanding the development pipeline, particularly for our funds management platform and delivering on our sustainability goals. Our logistics portfolio has grown to [ $4.6 billion in AU ] and now represents 28% of the group's diversified portfolio of high-quality assets. We have a logistics development pipeline with an estimated end value of $1.9 billion. That will continue to provide growth and high-quality product for both GPT and the QuadReal partnership. We recently secured a new office development site in North Sydney and the development of 51 Flinders Lane in Melbourne is underway. Both of these developments will provide new product for the Office Fund. Our mixed-use opportunities are being progressed, and we expect to commence the Rouse Hill mixed-use expansion in the first half of 2023. Our funds platform is being expanded with the management of the $2.8 billion UniSuper mandate being transferred to GPT from the 1st of September. The addition of this portfolio enhances the scale of our retail platform, following the divestment of Wollongong Central and Casuarina Square. And finally, we continue to innovate and drive leading outcomes in ESG. Leadership in ESG is a key strategic priority and a point of difference for GPT. We have more carbon-neutral certified floor space than any other Australian property owner, and we're on track for all our managed assets to be certified as operating carbon neutral by 2024. We have reduced emissions by 82% from our 2005 baseline, by optimizing how our assets operate, investing in technology and purchasing renewable energy. We're also targeting to achieve upfront embodied carbon neutral for the group's development pipeline. This involves eliminating or reducing embodied carbon through the design phase and the use of innovative construction practices and materials. Embodied carbon that hasn't been eliminated will then be offset with high-quality nature-based offsets. We have secured our carbon credits through a partnership with Greenfleet and the Traditional Owners. The partnership supports the restoration of 1,100 hectares of Australian, biodiverse native koala habitat. The project will generate carbon offsets for our operations and the embodied carbon for our development projects. Our recently completed Foundation Road project has been certified as Australia's first upfront embodied carbon neutral logistics development by the Green Building Council of Australia and Climate Active. And 51 Flinders Lane will be GPT's first upfront embodied carbon neutral office development. The group's leadership in ESG is becoming increasingly important as tenants select assets with strong environmental credentials. In summary, we have delivered a solid set of results for the half, and we continue to deliver on our strategic objectives. I'll return at the end of the presentation to provide my remarks on the outlook, and we'll now hand over to Anastasia Clarke to cover the financial results in more detail.

Thank you, Bob, and good morning. I'm going to start on Slide 8. It is pleasing to be reporting a strong financial result for the 6 months to 30 June 2022. Our statutory profit of $529.7 million is driven by funds from operations of $326.5 million and valuation increases of $219.5 million for the half. FFO per security has grown 9% on the prior corresponding first half. The result is driven by a strong recovery in retail, leasing in office and acquisition and developments in logistics. Free cash flow is lower compared to the prior period, which is driven by a higher amount of lease incentives paid in office. The distribution per security of $0.127 represents a 100% payout of operating free cash flow. Looking to each portfolio's performance on Slide 9 in the segment result. The result builds on retail's track record of a strong rebound once COVID-19 restrictions were lifted. We commenced the year with Omicron and the Code of Conduct extension to March. And despite this, customers have returned, resulting in strong sales growth, lower vacancy in our centers and lower COVID-19 tenant support being required. The retail portfolio result this half is partly offset by non-core asset sales, which were in the prior period income. Retail contributed $145 million to FFO. Office net income grew by 10.7%, primarily through leasing of vacant space and through annual base fixed rent increases, delivering like-for-like growth of 5%. Logistics contributed $91.2 million of FFO with growth driven from the upweighting to the sector through the acquisition of the Ascot portfolio and completion of fully leased new developments. Funds Management profit grew 15%, driven by revaluation gains and developments in GWOF and our growing QuadReal partnership. Finance costs increased by $9.8 million to $54.1 million, primarily as a result of increased borrowings for acquisitions and developments. Corporate overheads and tax expense increased to $32 million. This is due to one-off reorganization costs to streamline operations into 3 distinct divisions and also due to higher cloud-based computing costs made up of IT projects and IT license fee increases. Lease incentives have increased this period as we see the large office leasing volume achieved in the second half of 2021, flow through as incentives in the first half of 2022 as tenants commence occupation. Overall, we have delivered $270.6 million in AFFO for the half. On Slide 10, capital management. NTA has increased from revaluation increases to $6.26 per security, and gearing has reduced to 27.3%. The group maintained significant liquidity of $1.1 billion and a long average debt term to maturity of 6.3 years, with no material loan expiries until 2024. Our credit ratings remain unchanged since December and are in our target A-space range. We have added Slide 11 to report on how we're addressing the impact of rising interest rates. Inflation has increased and become more significant than expected. And as a result, we have seen a significant increase in global bond rates this year in anticipation of central banks having to respond to curb inflation. This presented us with the challenge of having appropriate levels of fixed interest rate hedge protection versus the market curve cost premium, which would lock in a sizable cost increase to future earnings. With bond yields recently falling from elevated levels in June, we increased our hedging levels substantially in late July to provide a greater level of interest rate protection over the next 2.5 years. The chart provides the contracted hedge levels in place over the remainder of 2022 and each half through to 2025. The table shows that the fixed hedge rate for 2022 full year is 1.7% and increases in 2023 to 2.6%. Overall, our interest rate exposure to FFO in 2023 is hedged at a base fixed rate of 2.6% for 80% of our current debt. From here, the pattern of RBA rate increases, the final peak floating rate and any potential subsequent rate cuts remain to be seen. Our credit margin and fees above base fixed and floating rates remained stable at 160 basis points. Our forecast all-in cost of debt will be in the low 3% range in 2022. And is expected to be increasing to the low to mid-4% range in 2023 with a high level of hedge protection in place. In summary, we are well positioned for the forward period. For an update on our office operations, I will now pass to Martin Ritchie.

Thank you, Anastasia. Good morning, and turning to Slide 13. The GPT office portfolio has delivered a strong result with first half comparable income growth of 5% and segment contribution up 11%, driven by income from 62 Northbourne, Queen & Collins, and 32 Smith. The total return was 8.9% for the 12 months to June and the weighted average cap rate is unchanged at 4.77% since December. Leasing of the portfolio is a key focus, with a total of 51,900 square meters of leasing achieved across 79 transactions, including heads of agreement. On Slide 14, the chart on the left illustrates that tenant inquiry in the market is tracking above 2019 levels. Based on the number of inquiries, tenants under 1,000 square meters continue to be the most active. While vacancy rates across the 3 eastern seaboard markets remain elevated at an average of 11.5%, we expect the increased market leasing inquiry to translate into net absorption of space. Tenant inquiry and activity shows the flight to quality. Prime-grade net absorption continues to be well above secondary stock. GPT is therefore well placed to capitalize on this due to its 100% prime grade portfolio and the significant investment that's been made in the assets over recent years. The right-hand graph indicates the face and effective rents are growing, whilst incentives remain elevated. Turning to Slide 15. Work from home practices have changed our occupancy use office space. Our expectation is that most companies will continue to value office space to attract talent, to collaborate and to build company culture. Our leasing strategy embraces this change by offering 3 distinct products, traditional space, premium suites and space on demand. This appeals to a broader range of customers. Traditional space is the largest proportion of our portfolio at over 80%, as you can see in the chart at the bottom. These customers are attracted to our locations, amenity and sustainability, and they are now seeking greater flexibility. GPT's flexible space on demand product is called Space&Co. The slide gives you an indication of some of our larger Space&Co. customers. Smaller companies and start-ups are also attracted by the exceptional amenity that we offer. We then develop relationships and incubate these customers whilst they grow into larger premises. Our premium suite product is space that's being designed and fitted out by us for immediate occupation. The suite set a benchmark for high-quality fit-outs to last several lease terms. We have delivered 43 suites, over 18,000 square meters across the portfolio in the first half. Of these, 24 have been leased and 14 were just completed in June. We expect them all to be leased by the end of the year. The suites have achieved leasing success. Rents are 15% higher, downtime is 5.5 months shorter, the capital cost is in line with market incentives and the lease term achieved averages 4.4 years. Moving to Slide 16. Despite the Omicron outbreak and severe weather conditions, we signed 28,000 square meters of leases and over 23,000 square meters of heads of agreement in the first half of the year. Melbourne has been a key leasing focus, and we continue to reduce vacancy there. For example, at 181 William & 550 Bourke Streets, the asset was 55% committed at June 2021 and is now 81% committed at June 2022. The graph on the right shows that the portfolio has maintained an occupancy rate above the prime market average. On Slide 17, our high-quality customer offering has positioned GPT well to increase portfolio occupancy. The team are targeting a higher leasing volume in the second half, supported by 3 factors. Firstly, the market is seasonal with greater leasing volumes achieved in the second half. Secondly, we will deliver another 33,000 square meters of premium suites across the portfolio, including GWOF, which we expect to lease quickly upon completion. And thirdly, we have streamlined our leasing to respond to our customers faster. Slide 18 shows that we have grown our development pipeline to $5.5 billion, providing an opportunity for GPT and its funds to develop next-generation assets and enhance returns. GWOF secured properties at Walker Street in North Sydney, where we are now working to obtain a DA for a tower of over 45,000 square meters with an earliest construction start in 2024, following the opening of the nearby Victoria Cross metro station. 51 Flinders Lane is underway with an expected delivery date in late 2025. Project commencements will be led by tenant pre-commitments and market conditions. The timing to commence is entirely within our control. Turning to Slide 19. GPT was market leader in 2018 when GWOF committed to achieve carbon-neutral operations by 2020, which we achieved. GPT is again leading the market in committing to all new office developments being upfront embodied carbon neutral. I'm very proud to announce that 51 Tinder's Lane will be GPT's first office development to be upfront embodied carbon neutral and certified on completion through Green Star and Climate Active. The Green Building Council of Australia has already verified the carbon-neutral design commitment through the Green Star process. Turning to Slide 20 for the office outlook. The demand for highly sustainable workplaces has increased, and GPT's certified 5.8 star NABERS Energy rating provides a competitive advantage. We're on track for the entire office portfolio to follow GWOF's 2020 achievement and to be carbon neutral by 2024. GWOF has grown to $10.1 billion in assets under management and has low gearing of 18.8%. We have a $5.5 billion development pipeline, providing an opportunity for GPT and its funds to develop next-generation assets and to enhance returns. The office continues to play a crucial role to attract talent, collaborate and build company culture. GPT's portfolio is well located, presented and serviced with significant investment made to create distinctive and desirable places. Our 3 space products respond to our customers' needs and provide them with the flexibility that they desire. Our offering, customer-centric approach and well-resourced team will support a successful second half of leasing. I will now hand over to Chris Davis to discuss the logistics portfolio.

Thank you, Martin. The logistics portfolio has delivered strong results in the half with FFO of $92 million, up 22% with growing contributions from development completions and acquisitions. Comparable growth of 2.4% was achieved with positive income growth, partly offset by vacancy, which has now been substantially leased. Our portfolio has high occupancy and 228,000 square meters of leasing deals were completed. We are capitalizing on market conditions with speculative development leasing in the half, achieving rents 9% above our feasibilities. The economic uncertainty has come at a time when the fundamentals of the Australian logistics sector are strong with record low vacancy and momentum and tenant demand driving rents higher. GPT's portfolio is well positioned to grow and capture market upside through upcoming expiry and a $1.9 billion development pipeline. Turning to Slide 23. 2 developments have been completed this year, both are fully leased and delivered a yield on cost of 5.6%. Our partnership with QuadReal is progressing well with 3 projects reaching completion and half of the $2 billion fund target now committed. This includes a site secured in Melbourne's North on a 12-month delayed settlement that will deliver 134,000 square meters of prime space. Moving to Slide 24. Demand for space has been dominated by transport and retail groups and market rents have recorded double-digit growth over the past 12 months. Delays to the release of land and build out of product has restricted supply, which combined with historically-low vacancy has constrained leasing activity. In Sydney, vacancy of just 0.3% is forcing many tenants to lay new space requirements and focus on pre-lease options for late 2023 or 2024, providing favorable conditions for our Kemps Creek project. We have high levels of inquiry across our development pipeline with our team engaged on 1.1 million square meters of tenant briefs, increasing from 6 months ago by 1/3. Over 80% of the inquiries for groups growing the real estate footprint, upgrading to larger and more efficient facilities. An example of this trend is JB Hi-Fi, who are expanding by 50% within our Berrinba state in Brisbane. Vacancy rates will remain low into 2023, underpinned by high pre-committed levels of over 60% for stock under construction. Now on Slide 25. We had an excellent half with 228,000 square meters leased through an heads of agreement. We have leased out the elements well above the market rents expected when we commence construction. This includes our underway project in Melbourne, leased rents 19% higher than deals in the same estate last year. Within our operational portfolio, we've made great progress in leasing vacancy and upcoming expiry. Bunnings has leased 40,000 square meters in Melbourne, while Go Logistics has committed to 30,000 square meters in Sydney. Both are examples of expanding occupiers that add to the diversity of our customer mix. Moving to Slide 26. We're implementing sustainability initiatives to maximize performance. We're excited to have delivered Australia's first upfront embodied carbon-neutral logistics development, certified by the Green Building Council of Australia and Climate Active as part of the building's Green Star design and as built rating. Through better design and material selection such as low carbon concrete, [ which reduce the ] development's carbon footprint, and we have then applied high-quality nature-based offsets for the residual. At each of our developments, we're installing solar and batteries, and through our existing assets, we're providing customers with the opportunity to access cost-effective on-site renewable energy. Moving to Slide 27. Our development pipeline has expanded to $1.9 billion and will deliver enhanced returns with a target yield on cost of over 5.25%. We are seeing higher development costs. However, this is being offset by market rental growth. The 2 projects due for completion in the second half are 85% leased and a further 2 projects are underway. The group's multistage projects in each of the key eastern seaboard markets are proving an advantage when engaging with existing and target customers as they expand their networks. Turning to strategy and outlook. Funds under management will grow as we deliver our developments and target a further $1 billion of projects in the QuadReal fund. We have a highly capable and engaged team supporting the growing needs of our customers. Over 40% of our portfolio has been developed by GPT, demonstrating its high quality and our ability to expand through development. Our portfolio is concentrated to the eastern seaboard markets, which we expect to outperform nationally. The low vacancy and momentum of tenant demand will support strong rental growth. With half of our portfolio to expire over the next 5 years, we are well positioned to capitalize on the market conditions and our development pipeline in partnership with QuadReal provides further opportunity to enhance returns. I will now hand over to Chris Barnett to present the retail results.

Thank you, Chris, and good morning, everyone. The first half of 2022 has continued to build on the momentum and recovery that we experienced at the end of last year. All of our assets delivered exceptional sales growth with our total specialty sales growing by 11.6% on last year. And when compared to pre-pandemic 2019, our specialties grew by 6.5%. There continues to be a high level of conviction from our retailers, and we finished the first half with our portfolio occupancy at 99.3%. All of our leasing metrics have outperformed when compared to the previous reporting period. In terms of our financial performance, the result was substantially up on the first half of '21, driven predominantly by our superior leasing outcomes and strong cash collections. Now turning to Slide 31. And as Bob has highlighted earlier, we're excited about the opportunity to grow our retail assets under management to over $10 billion, following the selection by UniSuper to manage their mandate. The quality and composition of the UniSuper portfolio complement our existing assets, and we see real synergies from a leasing perspective, not to mention the benefits of scale that will derive from the combined platforms. Now turning to our leasing results on Slide 32, where our leasing performance for the first half of '22 has continued to build on the successes of last year. Our strong deal activity has resulted in an improvement in our portfolio occupancy. Our vacancies and holdovers are down, and we have materially improved our leasing spreads. What's exciting about the high level of leasing activity is that we have transacted with over 76 new brands opening for the first time in a GPT center. Importantly, all of our leasing deals remain with base rents and fixed annual increases, and we have seen a return to longer tenure with 4.6 years being the average term for all deals completed. Now turning to sales on Slide 33. And as shown on the top chart, excluding January, which was affected by Omicron, month-on-month sales have delivered strong growth on 2021. Total center sales were up 11.5% on last year, but more importantly, our total specialties were up 6.5% on pre-COVID 2019. In June, total center sales exceeded 30% on last year as it compared to a period of lockdown, however, when compared to 2019, our total specialties grew by over 9%. Looking at sales in more detail. Slide 34 highlights that every retail category has shown growth when compared to the first half of '21. It's great to see cinemas returned to normal, up 90% on last year now that they can showcase exclusive product without restrictions. Health and beauty, dining, retail services and most importantly, fashion, have all shown double-digit growth for the first half. Now turning to Slide 35, where I wanted to provide an update on Melbourne Central's recovery, where sales for the first half were up 37%, and we've seen a continued improvement in center visitation. Comparing the month of June to pre-COVID-19, our total specialty sales per square meter were up 2%. The center is benefiting from the return of university students with fashion, dining, and tech retailers, all exceeding their June 2019 results. Our leasing team have continued to deliver first-to-market retailers who are choosing Melbourne Central to open their flagship stores. The successful recent opening of the LEGO store, which is the #1 in Australasia will be joined by Under Armour, Calvin Klein and the launch of the much anticipated Monopoly Dreams later this year. Our outlook for the center remains positive, supported by the retail market's fundamental belief in the quality of the asset. Now turning to a development update on Slide 36, where the performances of both Rouse Hill and Highpoint continue to support the commencement of their mixed-use developments. Rouse is on track to commence early next year with the project having extensive retailer support, given that the existing center has been fully leased for the past couple of years and total center sales exceeding the first half of 2019 by an impressive 29%. Off the back of securing the mixed-use Master Plan at Highpoint late last year, we will be lodging the Stage 1 residential DA with 240 apartments and the Stage 1 commercial DA for an 18,000 square meter office complex by the end of the year. Finally, turning to Slide 37. GPT will continue to be a leader in ESG. And next week, we will be launching our Smart Energy Hub at Chirnside Park. The hub is the first of its kind in Australia and will allow us to harvest energy from the solar array and store it safely on-site in a 2-megawatt hour battery. The combination of solar generation and storage, coupled with our flexible load management will generate considerable energy cost reductions and assist in stabilizing the grid. In relation to the GPT wholesale shopping center fund, which has successfully executed on its strategy to optimize its portfolio of assets with the divestment of Wollongong Central and Casuarina Square. This has resulted in the fund having low levels of gearing and it's well placed to take advantage of any upcoming opportunities. Sales growth for the first 6 months of the year were strong. However, we do see this moderating as the impact of interest rates will curb discretionary spending. Our view on the leasing market remains positive. And off the back of the solid sales environment, we believe our leasing spreads will continue to improve in the second half. I'll now hand you back to Bob to provide some comments on the outlook for the second half of '22.

Thanks, Chris. I'd now like to turn to outlook and guidance for 2022. We have seen a rapid change in economic conditions over the last 6 months with inflation expected to be in excess of 7% this year and the RBA responding more aggressively than we had anticipated. This will no doubt slow economic growth and consumption in time. However, unemployment is forecast to remain well below long-term averages and inflation should retrace materially over the course of 2023. In line with rising interest rates, GPT's cost of debt will increase in the second half of 2022 and further in 2023. Higher bond yields may also lead to a softening of valuation metrics. However, this will be somewhat dependent on where bond yields settle. While global and domestic investors continue to advise that there's demand for high-quality real estate, capital is sitting on the sidelines until there is greater clarity on the economic outlook. As you heard from Chris Barnett, we are continuing to see good momentum across our retail portfolio with strong sales growth and leasing activity. Our portfolio has high occupancy. And while we expect sales growth to moderate, our portfolio is well placed with fixed rental increases and positive leasing demand. For the office sector, we expect leasing volumes will improve in the second half of the year. Vacancy rates across the office sector remain elevated, but we are seeing demand from tenants who want to be in high-quality buildings with distinctive spaces. We are providing flexible space and leading edge fit-outs in response to changing customer preferences and this is achieving results. There is clearly a flight to quality as businesses use both flexibility and their workplace to attract talent. In logistics, market conditions remain very favorable, with elevated tenant demand, low vacancy and constrained supply. We've expanded our development pipeline. And while development costs have increased with escalation and construction costs, this is being offset by strong rental growth. Our development pipeline in partnership with QuadReal positions us well for further platform growth. We have expanded the group's development pipeline, which will provide further growth opportunities for both the group and our managed funds. The office development pipeline provides an opportunity to create next-generation assets at the appropriate time. And finally, the UniSuper mandate will provide increased scale to our retail and funds management platform, and we expect that this will provide further growth opportunities in time. Turning now to FFO and distribution guidance. We have delivered strong first half results. And while interest costs will rise in the second half, we expect to deliver FFO of approximately $0.324 per security for the full year, which is at the upper end of our guidance provided in February and a distribution of $0.25 per security. So that concludes our formal remarks, and I will now hand back to the operator for your questions.

[Operator Instructions] The first question today comes from James Druce from CLSA.

First question is just around the tightening of guidance in the top end of the range. Can you just talk through some of the detail there?

Yes. Look, thanks, James. Yes. First of all, we think we delivered a strong set of results for the first half. And I guess it's given us confidence on what the outlook looks like for the second half. The key movers or drivers for the second half are really continuing to see good momentum with -- in our retail portfolio, cash collections continuing to remain strong. We will see debt costs or cost of debt rise as Anastasia flagged in the second half. But all in all, we've looked across our portfolio, and we're pretty confident about the outlook for the second half and tightening that guidance to be at the upper end of the range.

Okay. And maybe just touch on the contribution of COVID allowances and land taxes as well.

Yes. So I'm going to ask Anastasia just to answer that one.

Sure, James. So it is a combination of them both being lower. I know it might have surprised and apologies, if we've confused with our language, but COVID allowances are $11.5 million lower in this first half result than the prior comparative and land tax refunds are lower by $1.7 million. So both are lower and the net effect of $11.5 million, less the reduction in land tax refunds of $1.7 million is the $9.8 million we've described in the pack. So just to be clear, land tax refunds in first half '21 were $2.7 million and in first half '22 $1 million.

Yes. Okay. That's great. And maybe just one follow-up on the -- sorry, just on the question on the office sector. Can you just talk about how incentives have been changing over the past few months and our outlook is for the next 6 months?

Yes. Thanks, James. Look, the average office incentive has been around sort of 35% to 40% probably averaging around that sort of 37% has been the average incentive not been relatively stable through the period. We haven't seen them move up at all. I think I'd have reported about a similar number in February, and I think that's -- they seem to have stabilized around that level.

The next question comes from Caleb Wheatley from Macquarie Group.

My first question is just around potential for growth initiatives, particularly the comments around the balance sheet being well placed. Where are you seeing the best opportunities between merchant development is up there. But is something like a buyback now becoming attractive again at a 28% discount to intake, could you speak through some of the growth initiatives you could be chasing?

Yes. Thanks, Caleb. Look, certainly, we're looking at all the opportunities to drive growth in the business. And we've been very successful in the build-out of our development pipeline in logistics, and we'll continue to do that. We think that makes sense for us. We do give thought to a buyback, particularly given where our security price has been trading. But given the current market uncertainty and the change in the cycle, we think it's -- we should be prudent with the use of our balance sheet capacity at the moment. When we last reactivated the buyback or activated the buyback, it was in the first half of last year. And we just sold Farrer Place. Our gearing was below about 25% sort of lower threshold. And we were expecting at that time, the interest rates remain really low. But clearly, the macroeconomic environment is really different today. So we want to be prudent about how we use our balance sheet. As I said, we are continuing to undertake some developments, and we think that is a good use of our capital. Given we already own the land banks, the return of that incremental development spend will deliver at least the same NTA and earnings accretion as pursuing a buyback. So we're comfortable with that decision to actually continue to deploy capital into some of those developments. But it's something we continue to monitor and look at how do we drive further growth for the business.

Just in terms of those relative returns within the development book, you've obviously flagged the greater than 5.25% in the logistics development pipeline in terms of yield on cost. How does that stack up against some of the opportunities in the office book? Are you seeing that logistics is, I guess, a more preferable place given the returns there?

Look, the 5.2%, I still think is an attractive return yield on cost. Rouse Hill, the development for that, we're targeting in excess of 6% yield on costs for that development as well. The office development is a little bit further out. So we've got a bit more work to do on those at the moment. And they will be really subject to market conditions and pre-commitment levels. So a bit too early to speculate on what those returns will be just at this point, but certainly very comfortable with the returns we're getting out of logistics. And also, as Chris said, Rouse Hill has been delivering phenomenal growth for us in terms of sales out there. And we've got a modest expansion planned with -- it's a mixed-use expansion, and we think that will deliver a year on cost in excess of 6 -- in excess of 6% as well. So we think that's an attractive use of capital.

That's clear. Maybe just a final one for me. Just around the comments regarding office leasing volumes going to improve. What does that mean for, I guess, incentives and occupancy across the table? Do you think that will begin to, I guess, recover to the back end of this year as leasing volumes improve? Or is it still going to be potentially a bit of a delay between the 2?

I'll ask Martin to give you a little bit of color on what you're seeing in leasing inquiry coming through and the question you've just raised. Martin?

Yes. Thank you. We are seeing increased levels of inquiry currently for our assets, and we do expect that to start to translate into higher levels of leasing deals. One of the key areas, of course, is that we've invested quite heavily in our buildings over the last couple of years. So they are in a very attractive state and our premium suite strategy is something that tenants like because it's immediately occupiable, and that leads to more rapid leasing take-up and leasing transactions.

You just speak through the premium rate strategy in the economics there. Is that more just a method of, I guess, accessing a new part of the tenant market? Or is it actually potentially a higher returning if you can, I guess, execute?

Yes. I guess, I mean, the starting point for the premium suite strategy is that, that size tenant makes up about 40% of the market, but we're only exposed to about 10% of it. So we took the view, it's a very active part of the market. And if we could deliver the right kind of suites that we could lease space more quickly. And I think our results demonstrate that we're probably 15% better on rent, 5.5 months better on downtime, and we're delivering them for around the same price as a market incentive. So it's been a very -- a very strong strategy that I think has got plenty of capacity to continue.

I think it also creates momentum of the assets as well when you're seeing space being leased up, and that generates inquiry in addition to it as part of that momentum story. Look, there's no doubt the market is challenging, but this part of the market seems to be more active, and that's why we're certainly pursuing it. And we think the returns are good. And they'll make the assets more resilient in the longer term as well, where you won't have the -- as many sort of larger, lumpier sort of expiries. So we think it's a good strategy for us to pursue.

It sounds like on a net effective basis, you're maybe doing a little bit better on face rent, no change in your -- I guess, your incentive outlay there. So it should be, I guess, economically better off doing...

Economically, yes. That's exactly right. Economically, we're getting better returns by pursuing the strategy. But look, that doesn't mean we're pursuing that. That's the only strategy. We still have our traditional space that we'll be continuing to target the mid- to larger-sized tenants as well.

The next question comes from Sholto Maconochie from Jefferies.

Just a couple for me. On the -- in July, you post balance [indiscernible] into the new interest rate hedging and swaps. Can you talk about how much that cost that's going to be below the line in the second half?

I'll get Anastasia to answer that? If that's okay?

Yes, sure.

Sholto, well, they're at the money swaps. There's just no fixed interest rate hedges. So there is no capital spent. There's no optionality to callables. We've been quite deliberate in our reporting that they are fixed rate hedges. And in late July, you saw the market swap curve reduced to 3%, which we thought was an opportune time to add substantial hedging. We've added 40% hedge level over the next 3 years. And that compares, say, that 3% to a recent peak in early June, mid-June of 4.2%. And of course, rates are back up now at around 3.6%. So we had been less willing to add hedging where we felt the market curve was at a significant premium to where say, bank economist consensus forecast is and even where the RBA comments are, which we felt was that circa 3% level by early next year, and that's why we put on substantial hedging.

So there's no cost because one of your peers did some post-balance date of $600 million for inter swaps, increased them because of $21.6 million, but seriously there's no capital cost at all to enter into increased hedging?

We have not spent $1 in capital on interest rate hedging or any dollar of expense other than just a normal fixed rate hedge, which is the market rate, and you'll pay it over time in terms of what that fixed rate is.

Okay. Great. And then just on the guidance, it looks good, you had a strong first half. Thanks for clarifying that on the land tax and COVID charges. But it looks like earnings going about 10% second half. That looks to me that it's mainly all from the debt cost because I think you said low 3%. So if you assume sort of I think 2.5% average for the first sort of 3.75% in the second half, that's about a $30 million headwind in the second half. Is that why the main driver of the second half going backwards?

Yes, that is the main driver, Sholto. We did also have a contribution in the first half from Casuarina for the first quarter of last year, so which we don't get in the second half. But the main driver is the additional funding costs.

Yes. And then what was the end of the cost of debt as at 30 June, Anastasia? What does that end up being?

We don't have any of that cost of debt because it's a period number. So 2.5% first half, probably high-3s, maybe 3.9% in second half, and that will give you an all-in rate for the full year of that low 3% that I indicated.

Okay. That makes sense. And then just finally, on the incentives, I think you've done a lot of leasing in this half as it was very big in second half '22 in office. The lease incentives probably a lot higher in the second half. Do you expect the CapEx incentives and maintenance CapEx to pick up in the second half?

I think assuming a similar sort of run rate in the second half is about right I'm just being told. What was that? Sorry.

Sorry, Sholto, I wasn't listening.

I'm sorry.

I was talking to someone else.

I'm sorry, Bobby. You're in trouble now.

I'm in trouble.

I heard you say, incentives, and I thought you're talking leasing.