The GPT Group (GPT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the GPT 2023 Interim Results Briefing. [Operator Instructions] I would now like to hand the conference over to CEO and Managing Director, Bob Johnston. Please go ahead.

Well, good morning, everyone, and welcome to GPT's 2023 Interim Results Briefing. Joining me for today's presentation are Anastasia Clarke, our Group CFO; Chris Barnett, Head of Retail and Mixed-Use; Martin Ritchie, Head of Office; and Chris Davis, Head of Logistics. I'd like to start by acknowledging the traditional custodians of the land on which our business and our assets operate and pay my respects to elders past, present and emerging. I extend that respect to aboriginal and Torres Strait Islanders People participating in this briefing. I'm pleased to report that we have delivered a solid result for the first half in what continues to be a challenging environment with the RBA cash rate increasing 400 basis points since May last year, impacting earnings and valuations. FFO per security for the half was AUD 0.1653 per security, down 3%, and the group has declared an interim distribution of AUD 0.125, which is down 1.6% on the prior period. NTA and total return were impacted as a result of the valuation of the investment portfolio declining approximately 2%. The weighted average cap rate softened 25 basis points to 5.11% and the occupancy of the group's diversified portfolio is close to 98%. Including the new mandates we secured last year, the group has AUD 19 billion of funds under management and AUD 32.2 billion in assets under management, providing diversification across the sectors and viable funds management earnings stream for the group. Our retail platform has continued to deliver strong results with occupancy of 99.5%, positive leasing spreads being achieved and sustainable occupancy costs. Melbourne Central has recovered with sales up 26% on the first half of 2022. While sales growth has slowed as higher interest rates flow through to the consumer, unemployment remains low, population growth is rebounding and the house prices have stabilized, which should provide a level of support to retail sales. Our logistics portfolio is also delivering strong results. Ongoing tenant demand and low vacancy in each of the key markets is driving rents higher and we are capturing this through leasing spreads and through our development completions. During the period, there were 3 development completions, and we are targeting to complete a further 2 developments in the second half. The office sector, however, remains challenging due to elevated levels of market vacancy and the reduction in workspace requirements as a result of remote and hybrid working. During the period, 58,800 square meters of leasing was achieved, and portfolio occupancy at June 30 was 88.5%, in line with December last year. While we have some further lease expired in the second half, we are currently targeting to achieve portfolio occupancy of approximately 90% by the end of the year. Clearly, office leasing remains a key focus for the group. In May, we commenced a marketing campaign for our 50% interest in Australia Square. However, investor appetite remains cautious, and the sales process remains ongoing at this point in time. The group's balance sheet remains in good shape with gearing below the midpoint of our target gearing range. We are holding high levels of liquidity and have modest debt maturities over the next 2 years. We've also continued with our focus on ESG leadership. This continues to be important for investors in GPT, but also investors in our funds and mandates. All our investment assets were independently revalued as at June 30. And as mentioned earlier, this resulted in a decline in the portfolio valuation of approximately 2% or AUD 341 million during the period. This was largely driven by the office portfolio with a valuation decline of 4% with cap rates expanding 21 basis points to 5.24%. Investment metrics for retail softened a similar amount. However, this was partially offset by increases in market rents, leading to a valuation decline of 1.8%. Investment Metrics Logistics saw the greatest movement during the period with cap rates for our portfolio expanding 38 basis points to 4.78%. The strong growth in market rents has offset the softening of investment metrics with the logistics portfolio valuation effectively flat for the period. As you know, there has been limited transaction evidence in the first half for values to rely on, however, with confidence emerging that the interest rate hiking cycle is now likely to be close to peak, I expect that we will see more transaction evidence emerge over the next 6 to 9 months. In summary, it has been a solid half from each of the sectors, offset by a material increase in finance costs, reflecting the high interest rate environment. I will now hand over to Anastasia to provide more detail on the financial results before we hear from each of the sector heads.

Thank you, Bob, and good morning. Commencing with the financial results for the 6 months to 30 June. Today, we are reporting a slight statutory loss of AUD 1.1 million, funds from operations of AUD 316.7 million and the positive AUD 23.5 million mark-to-market treasury instruments was offset by decreases in valuation of AUD 341.3 million from office and retail. FFO per security declined 3% on the comparative first half, which I'll provide more detail on in a moment. Free cash flow grew 2.6%, driven by favorable working capital movements and lower office lease incentives due to less office lease commencements in the half. The distribution per security of AUD 0.125 represents a 95.9% payout of free cash flow and a comparative reduction in distribution of 1.6%. Turning to each portfolio's performance in the segment results. Retail segment income grew 9.5% to deliver AUD 158.8 million in FFO. Strong growth in retail earnings was driven by underlying rent increases, higher growth in retail sales delivering turnover rent and the collection of previously provisioned aged debtors. The office segment income declined 3.5% to AUD 143.7 million of FFO as a result of lower average occupancy and lower income from the wholesale office fund due to higher interest costs. Logistics income grew 7%, contributing AUD 97.6 million to FFO, with growth driven from base rent increases, positive leasing spreads and the contribution from developments fully leased on completion. Funds Management profit grew 24.7% to AUD 34.3 million as a result of the contribution from new mandates. Finance costs increased materially to AUD 82.5 million, up from AUD 54.1 million due to a higher cost of debt of 4.1% compared to the comparative half of 2.5%. I will speak further about the group's hedging and cost of debt shortly. Tax expense increased by AUD 2.7 million, in line with the increased fee income from the new mandate. Lease incentives declined due to a lower level of new office lease commitments during the half. Overall, the group has delivered AFFO of AUD 265.8 million. Now turning to the group's hedge position and projected cost of debt. Our floating interest rate exposure has reduced during the half, with the group lengthening hedge duration and increasing the level of interest rate protection. This has resulted in the next 18 months being approximately 90% hedged, and our average fixed rate over the next 3.5 years is 3.5%. Combining base rates with margin and fees, which have remained stable, our forecast all-in cost of debt increases from 4.1% in the first half to 5.2% in the second half, resulting in an estimated full year cost of debt of 4.7%. Turning to capital management on Slide 11. NTA has decreased to AUD 5.85 per security due to office and retail portfolio valuation decreases at 30 June. Net gearing is stable at 28.1%, remaining in the lower half of our management target range of 25% to 35%. The group further increased available liquidity to AUD 1.5 billion, which funds the group's debt refinancing and capital commitments through to mid-2026, and we maintain a long average loan duration of 6.1 years. We are mindful of the risk of further asset valuation decreases, informing our ongoing disciplined approach to capital management, noting that the group has limited capital commitments. In summary, the group is positioned well. Our credit ratings remain within our target as base range, and we maintain a strong balance sheet getting into the second half. I will now pass to Chris Barnett for an update on our retail portfolio.

Thank you, Anastasia, and good morning, everyone. I'd now like to take you through the results of our retail business, which has continued to perform strongly at the back of our exceptional year last year. Our financial results for the half have delivered comparable income growth of 6.4% over the prior period, predominantly as a result of rental growth, strong sales driving higher turnover rent and our continued success in debtor collections. Our leasing team continues to perform strongly, following the momentum from last year with our portfolio occupancy now at 99.5%. Our Total Centre sales grew 11.8% at 30 June and are now almost 17% up on pre-pandemic. This growth in sales has also driven specialty productivity to over AUD 12,700 per square meter and delivered a portfolio specialty occupancy cost of 15.70%. Off the back of the recent trading environment, our retail partners are in great shape with retailer sentiment and outlook remaining positive. Now turning to Slide 14, where the retail market in Australia continues to grow strongly during the first half of 2023. This growth in sales results in the size of the market being over 20% larger than pre-pandemic and is strongly supported by low levels of unemployment, high household savings and population growth. Retail price inflation has had a positive impact on retail sales. And as retailers have been able to pass increased operating costs on to consumers, their profitability has outperformed over the past 3 years. 2023 has also seen physical stores continue to recapture market share from online with over 90% of all retail spending in Australia now involving a physical retail shop. Now turning to Slide 15 and continuing of the success of last year, our leasing teams have been able to maintain their momentum to improve all of our key leasing metrics for the half. The growth in total specialty sales has delivered a historically low occupancy cost, resulting in strong retailer demand and high center occupancy. The combination of the above has enabled our leasing spreads to achieve a positive 3.4% for the 343 deals concluded to June. And for the deals completed during the half, all was structured with fixed base rents and annual increases averaging 4.8% and our leasing terms have now extended to over 5 years. Turning to retail sales on Slide 16, where our centers continued to perform strongly, growing at 11.8% and our total specialties were up 10.1% for the half. Our major retailers have all continued to grow when compared to the very productive first half of '22. Supermarkets have grown 13.1% for the half, which is 20% higher than 2021. And similarly, our total specialties have also grown by more than 10%, resulting in a 20% increase from '21. The graph on the left of the slide highlights that the majority of our specialty categories are showing strong growth with dining, health, beauty and fresh food leading away. Now turning to Slide 17, where I wanted to provide an update on Melbourne Central, which continues its remarkable recovery. The Total Centre's MIT is now exceeding pre-pandemic levels, and our total specialty productivity has improved to AUD 15,200 per square meter. Strong leasing demand has driven occupancy to 99.7% as the asset continues to attract first-to-market retailers and it's this demand that has allowed the center to achieve positive leasing spreads of 7.2% on average for tenants that have renewed throughout the year. Our outlook for the center remains extremely positive, which will only benefit further and the expected increase in inbound tourism. Highpoint has also continued to go from strength to strength with MIT now exceeding AUD 1.2 billion. The center is benefiting from the successful introduction of Coles and Foodle, the recent opening of the first-to-market full-line Asian supermarket, which is owned and operated by renowned Melbourne restauranter, [ David Love ]. The center is effectively fully leased and off the back of our specialty sales productivity at around AUD 13,000 per square meter, we've achieved positive leasing spreads of 6.3% on deals concluded for the half. Highpoint continues to outperform and the asset is well positioned for future growth. With the complementary introduction of the UniSuper and ACRT mandates, GPT has established an enviable portfolio of quality retail assets. Our retail platform of 16 centers includes over 4,000 retailers generating sales in excess of AUD 9 billion per year. The scale of our retail platform gives us access to around 190 million customer visits a year to provide us with rich data and insight, which informs us to continually improve their experiences within our assets. The quality of our portfolio allows our leasing teams to enhance relationships across all sectors of the retail market from the highly productive luxury houses through to the daily needs and services, which anchor our successful fresh food pricing. Our focus on the customer remains our highest priority as we curate our assets to drive retailer sales productivity. Finally, on Slide 19. Our outlook for the second half of '23 remains positive. Retail sales growth has been exceptionally strong over the past 18 months, but we do expect that sales growth will moderate in the second half of the year. Our retailers are in good shape heading into a period of slower retail growth, having experienced high levels of profitability over the past 3 years, coupled with low occupancy costs. Our customers are enjoying high levels of employment and whilst household saving ratios have returned to pre-pandemic levels, Australian households have built up AUD 250 billion in excess savings when compared to 2019. Our retailers remain optimistic, which continues to drive leasing demand, ensuring that our assets are in great shape, and coupled with our quality portfolio and operating platform, we are well positioned for future growth. I'll now hand you over to Martin for the office sector update.

Thank you, Chris, and good morning, everyone. I'd now like to take you through the results of the office business. The portfolio has delivered AUD 163.9 million of income in the first half, which is a solid result in the challenging market conditions. The team is very focused on leasing. And despite lease expiry of approximately 4% this year to June 30, our portfolio has demonstrated its resilience by maintaining stable occupancy of 88.5% and WALE of 4.8 years. Office assets under management sits at AUD 14.4 billion. Vacancy remains elevated across our core markets and demand is low, with negative net absorption in Sydney with positive net absorption in Melbourne and Brisbane. Customers have numerous options and can command substantial incentives, making it a highly competitive lease in the market. Our leasing strategy is designed to differentiate our assets from the competition. It assists us greatly that our portfolio is entirely prime grade as we are clearly seeing that customers prefer high-quality space with great amenity to attract employees. Small occupiers under 1,000 square meters continue to be the most active, and we are seeing increased activity from medium-sized occupiers in the 2,000 to 4,000 square meters range. In respect of commercial terms, we see face rents increasing whilst incentives are expected to remain elevated. Leasing is the key focus for the team. We have achieved 58,800 square meters across 86 transactions for an average lease term of 4.9 years. This is a positive result for the first half. Larger customers accounted for nearly 60% and the balance of smaller customers under 1,000 square meters. Our fully fitted workplace offering, GPT DesignSuites made up almost 1/4 of the leased space. In spite second half of the year is 3%, and we are targeting occupancy of 90% by year end, I will now take you through the 4 aspects of our strategy to lease vacant and expiring space. The first aspect of our leasing strategy is providing digital space. GPT DesignSuites are fully fitted to a very high standard and includes all the technology required for our customers to connect and start working immediately. The design is adaptable and can be modified to serve different users over-time. Our customers tell us these suites are enticing their people back to the workplace as they provide an exceptional experience and foster collaboration. GPT's DesignSuites are being listed as award finalist for innovation by the Property Council of Australia and the Urban Developer. The suite provide the portfolio with greater diversity as we increase our exposure to sub-1,000 square meter customers, which make up approximately 40% of the market. They have been successful. Since January 2022, a total of nearly 50,000 square meters of GPT DesignSuites have been delivered. Those lease to-date were leased on average within 4.3 months of practical completion, achieving an average lease term of 4.3 years and higher rents compared to an unfitted whole floor rates. Providing flexible space is the second aspect of our leasing strategy. GPT Space & Co is regarded as a key attractor for customers to come to our buildings. It supports our customers' increasing desire for flexibility, offering a core and flex workplace solution. Customers get access to plug and play work-stations, small offices and meeting room facilities across all GPT Space & Co venues in Australia. This facility means that customers can take out extra areas as and when they need them and only for as long as they need them. There are 8 venues in the portfolio, occupying 14,000 square meters with 3 more under development. The third key aspect of our leasing strategy is maintaining high sustainability credentials. Almost all customers specify high ESG credentials in their workplace accommodation rigs. Therefore, it's an advantage for GPT to be a leader in this area. For example, the GWOF operating portfolio has been certified as carbon neutral since 2020. And all GPT office assets are now operating carbon neutral with climate active certification for the last few assets by the end of 2023. As you can see from the slide, the reductions in energy, waste and water are significant and also generate operational cost efficiency. The fourth key attribute is the high quality and amenity of our buildings. They are all prime grade and significant investment has been made over the last few years. 78% of the portfolio has been constructed or refurbished since 2012. The portfolio aesthetic and amenity meets the very high standards demanded from our customers. Premium amenity is provided to our customers through hotel like concierge services, food and beverage offerings, exceptional end-of-trip facilities, appealing third spaces, wellness and community events. Our high Net Promoter Score of 71 reflects our customer satisfaction with GPT's offering. Finally, on Slide 28, our outlook for the market is that high vacancy and low levels of demand will persist. We expect customers to remain cautious about making longer-term workplace commitments in this environment. However, the office will continue to play a vital role in building company culture and attracting and retaining talent. We expect leasing to remain very competitive for some time, and our portfolio will continue to appeal to existing and new customers as our assets have been recently refurbished with excellent amenity. Notably, we have approximately 18,000 square meters of GPT DesignSuites, well-progressed, which will help drive second half leasing. I'm confident that the 4 aspects of our experience-led workplace strategy means our portfolio is positioned well for a successful second half in leasing, and we continue to target 90% occupancy by the end of the year. I'll now hand over to Chris to provide the logistics portfolio update.

Thank you, Martin, and good morning. Logistics portfolio has performed strongly in the first half, achieving a segment contribution of AUD 99 million, up 7.4% as a result of underlying income growth, together with development completions. Comparable income growth was 5.1%, driven by re-leasing spreads, structured rent increases and higher portfolio occupancy of 99.8%. Assets under management has increased to AUD 4.9 billion as we grow our partnership with QuadReal and deliver enhanced returns through development. Turning to Slide 31. Occupier demand continues to outpace supply, with market rents growing by a further 8% in the first half. This is seen most acutely in Sydney with vacancy of just 0.2%. The low vacancy environment and limited uncommitted supply underway means many occupiers are not able to satisfy facility requirements in the immediate term. There is currently 2.7 million square meters of live market inquiry. And when comparing this to uncommitted supply, we expect to see vacancy remain low over the next 12 months. Now turning to leasing, where we've completed 109,000 square meters of deals in the first half. Leasing outcomes are helping drive income growth with our portfolio achieving a positive leasing spread of 40% on expiries and renewals. Our developments have contributed strongly to portfolio performance, achieving rents well in excess of feasibility commerce and the projects completed in the half are all fully leased. Transport operators and 3PLs are the most active sector in the market, representing around 40% of take-up. We have secured deals with a number of these groups, including leases to existing customers, Australia Post, DHL and Mainframe. This leasing activity continues to enhance the quality and diversity of our customer base with over 70% of income generated from ASX-listed or multinational companies. Turning to Slide 33. We have the opportunity to achieve further rental upside with nearly half of the portfolio expiring over the next 4 years. The logistics markets have seen sustained rent growth over the past 12 months on top of the increases experienced in previous periods. We estimate that for upcoming expiries, we are on average at least 15% under-rented compared to market. We are well-positioned to capture higher rents through the quality of our portfolio and execution of leasing and retention strategies. Now on Slide 34, we're seeing strong demand for new facilities in the best locations as our customers invest to make their supply chains more efficient. Across our partnership with QuadReal and our balance sheet portfolio, we will deliver 5 projects in 2023 with a forecast yield on cost of 6.4%. Our AUD 2 billion development pipeline is approximately 90% weighted to Sydney and Melbourne, and we expect to commence additional projects later this year to capitalize on pent-up kind of demand. We've been pleased to see a noticeable increase in the demand from customers seeking logistics facilities with strong sustainability attributes. Over half of Australia's top 100 industrial and logistics occupiers now have net zero targets, increasing the focus from these groups on sustainability over the past 12 months. We are supporting our customers on this journey through leveraging GPT's sustainability strategies. Our developments target minimum 5-star Green Star ratings and upfront embody carbon neutral certification. We are deploying a range of initiatives to maximize the efficiency of energy, waste and water resources and to preference locally made construction materials. We're also engaged in programs to support the well-being of our customers, staff, including through our partnership with a not-for-profit foundation focused on improving mental health in the transport and logistics sector. Now to outlook. We expect vacancy will remain low into the second half of 2023. With this being exacerbated by planning approval delays, particularly in Sydney, rents are expected to increase, albeit the rate of growth will moderate from the historic highs we saw last year. Our logistics strategy remains to maximize income opportunities, enhance returns through development and at QuadReal partnership and to broaden our relationships with customers and partner with them to deliver leading ESG outcomes. Our portfolio is concentrating in Australia's deepest markets of Sydney, Melbourne, Brisbane and is complemented by a pipeline of development projects that will further enhance the quality and scale of our portfolio. I will now hand back to Bob.

Thanks, Chris. We have seen a rapid change in economic conditions over the last 12 months with high inflation and the RBA responding aggressively with interest rate rises. It would appear that we are now close to the end of the rate rising cycle with the economy slowing and inflation trending lower. While the full impact of the rate rise is yet to flow through, unemployment remains low and house prices have stabilized, which should provide support to our retail and logistics businesses. As flagged by Anastasia, our cost of debt has increased, reflecting higher rates, and this will move higher in the second half as we continue to transition from ultra-low rates. We continue to see good momentum across our retail portfolio with ongoing tenant demand. Our retail sales are expected to moderate as the economy slows, our portfolio is well placed with high occupancy, sustainable occupancy costs and fixed rental increases. For the office portfolio, market conditions are expected to remain challenging due to elevated levels of market vacancy and the reduction in workspace requirements as a result of rebates and hybrid working. However, our portfolio is well positioned to satisfy tenant preferences for high-quality buildings with strong sustainability credentials and amenity. There is clearly a flight to quality as businesses use both flexibility and their workplace to attract talent. In logistics, our portfolio remains well positioned to deliver further rental growth given the ongoing tenant demand, low market vacancy rates and limited uncommitted supply. These favorable conditions will also support our development opportunities for both the balance sheet and our partnership with QuadReal. Expanding our relationships with existing and new capital partners is also an area we will continue to pursue following the successful integration of the UniSuper mandate and ACRT last year. We have a healthy balance sheet. However, given the economic uncertainty and the potential for further softening of investment metrics and valuations, we will continue to take a measured and prudent approach to capital management. In terms of earnings and distribution guidance for the year, the group expects to deliver FFO of approximately AUD 0.313 per security and a distribution of AUD 0.25 per security for the full year 2023. And finally, in terms of the CEO succession process, the Board is continuing to work with its advisers, Russell Reynolds to bring this process to a conclusion as soon as possible. There will obviously be an announcement at the appropriate time. So that concludes our remarks, and I'd like to now hand back to the operator for your questions.

[Operator Instructions] The first question comes from Caleb Wheatley from Macquarie Group.

My first question is just around FY '23 guidance. So just easing the trend from the first half, it seems like you're implying about a 11% decline into the second half. I'm conscious that you're flagging the rising cost of debt to 5.2%. But just wondering if you could provide any additional components of that guidance number we should be thinking about going to the second half, please?

I think the main factor is that we are seeing a step-up in interest rates or a weighted average cost of debt in the second half. And that's the drag on earnings in the second half. The underlying businesses continue to deliver in line with expectations. We've seen pretty strong performance in both retail and logistics. And clearly, there is some softness with office leasing. All-in-all, I think the main factor for the second half is the step-up in our cost of debt.

Okay. My second question, just on the office occupancy target. It seems like it's softened slightly to approximately 90%. I think the prior commentary was around sort of greater than 90%. Can you just provide some additional detail on if there was any moving around the edges there and the thoughts behind that. And then as we go into the second half, key expiries and any commentary on ability to re-lease those as well?

I'll start, and I might hand over to Martin in a moment. First of all, we're pleased to have secured about 59,000 square meters or just under that of leasing in the first half. Our DesignSuites product has been well received by the market, and that's gaining a lot of traction. We've got fair bit of that completing or it's under construction at the moment and will be delivered in the second half, and they are leasing up well in the market. So being well received. We have moderated the target, given, I guess, where we're at the end of the first half, and I guess the challenging conditions that we do will shadow over the next 6 months. But I guess we remain confident that we'll get to that sort of circa 90% by the end of the year. And as I say, it's a very competitive market. But Martin, do you want to give any more color on that?

Yes. I think perhaps the way to look at the leasing of the vacancy and the expiries is that we've done about 23,700 square meters in the first half that contribute to that 90% and have achieved about 15,500 square meters of leasing to get to that 90%. So I guess we feel reasonably confident that we can achieve that target.

Okay. And just some of your comments around DesignSuites and construction of those in addition to obviously trying to get to the target is probably going to require some incentive to come alongside it. Like how should we think about kind of free cash flow in order to get to that target? Is there a bigger risk that maybe you pay out a bit more with all this perpetuity work before in order to reach it or how should we think about it on an AFFO basis?

I think the way to think about DesignSuites is that the cost of providing a suite is in the order of a normal incentive for a 5-year lease term. To actually get the fleet away, there's only a couple of percent of incentive actually given, so it's negligible. So I think thinking about DesignSuites, I wouldn't be concerned about additional cost for leasing those. I might just ask Anastasia to give a bit more color there on the second half in terms of AFFO CapEx leasing.

There is a skewing actually to the second half. So you would have seen the results for the first half were down in office lease incentives, and we had a payout ratio of 95.9%. We're confident in our guidance that we've been able to maintain. And that's estimating around 100% payout of free cash flow. And we believe we will land in that 95% to 105% payout ratio. There's a skew into the second half associated with the maintenance CapEx in retail, but also an uplift in lease incentives paid in office.

In some of those lease incentives will be deal that we've done in the first half they starting to flow in the second half it could have even been done some of them last year. So there is a skewing on those leasing incentives in the second half.

Your next question comes from Solomon Zhang from JPMorgan.

First question was just on retail. Just wanted to get a comment on the deterioration of spreads from 4% in March to 3.4%. I know it's only very slight, but I think it's pretty interesting directionally. Is that sort of a bit less starting rent by 6 months?

The leasing spreads have improved 3.4% for the first half. I think that's up from 2.8% in December last year. The majority of the leasing spread at the moment is coming out of our new merchants around about 5%, and our renewals are at 2%. When you look at our spreads across the board, they're really being able to achieve greater spreads in our apparel, in our dining, our mini majors are up, travel is up and probably lesser positive number in more discretionary items like homewares and jewelry.

Chris, I was probably noting to the March spread of 4% versus the June. So very slight deterioration, but I will take your point that half and half has grown?

Look, for the half, we're up 3.4% or up 4% at March. It's probably more timing than anything.

There'll be certain deals that are a flow into that, they're just timing of deals, it's also.

Just 2 quick ones on the segment result, just the retail line. So the data collections increase of 4.1%, is that a write-back of ECL and one-off in nature?

That's correct, Solomon. AUD 4.1 million upside from a reversal of ECL provisions due to the cash collections that came in just at 101% for the half.

And just in terms of the turnover rent for the half, could you quantify how much of that is in that AUD 15.5 million number?

Solomon, around about AUD 5 million, but percentage rent as a total is, I think, less than 2% of our total revenue.

In terms of revenue for the retail group in between that sort of 2% and 3% typically is what it is. And I think it's in that range at the moment.

Your next question comes from Grant McCasker from UBS.

On retail, can we just touch on sort of more recent trading, July and any anecdote you have in August and how leasing has trended very recently?

I think maybe when we look at retail sales for the half, obviously, a very strong performance being 11% up, that was 16% for the first quarter, 8% for the second. In June, our result was closer to 5%. So we are starting to see a moderation of sales. We haven't completed our July numbers yet, but July will be comping against the strongest month in '22. And anecdotally, the numbers that we have seen would suggest that we're probably flat. Our leasing spread is really it's a consequence of demand supply. We've got really strong occupancy in our centers today. We've got high retail demand. So at the moment, we're being able to hold the pulls in spreads on the deals that we've concluded since June.

And can you touch on the reasons for the material increase in hold over for the period?

Look, it's material compared to December, but not compared to a usual half year of 6%, total revenue, total income, it's about consistent where we are at June. We obviously have a harder run home for the year where we try to complete most of our deals before the end of the calendar year. So December usually is a lesser hold over percent in June.

And then just turning to logistics and logistics development. Can we touch on [ Eurobond ], it looks like you've reset costs for that project. Can you just remind us the timing of when you expect to get some projects out of the ground and the reason for them to sort of increasing costs.

Look, as you may know, Sydney Water levies have been imposed on a lot of the development sites out at Kemps Creek. And that's been the material change to be quite honest in those costs. Clearly, what we've also seen is rents have stepped up significantly out in that market. But Chris, do you want to give more color on that and when you think we'll see the first solvent come out of the ground there?

Yes. So we're a long way progressed in terms of the planning process. It certainly has been protracted. So it's a little frustrating, but we hope that, that will be finalized in the next couple of months. And then we look to be on site later this year to start earthworks and then the first building starting in the first half of next year. But in terms of that market, obviously, as Bob mentioned, there's been very strong rent growth. There's a lot of pent-up tenant demand looking at that space. But obviously, we haven't been able to commit deals because of uncertainty with planning, obviously, with vacant 0.2%, there's a real need for that stuff to come online.

So just to confirm, nearly the AUD 100 million increase in cost relates to the Sydney Water.

There's a mix of elements. So there's the Sydney Water, which is the largest component. There's also been updated construction costs naturally just in what such a couple of years, but also with higher rents, there is also the higher incentives that were assumed. So we're still assuming the same sort of percentage incentive, but naturally the actual content of dollars have increased as well. They're the main components.

Okay. And then just a quick one, Australia Square. Can you provide any the commentary on that. If it doesn't go ahead, where could we expect to see some asset sales?

Yes. Look, the process commenced back in May for the sale of Australia Square. As you know, transactions have been -- volumes have been very low in the first half of this year, and buyers continue to sort of sit on the sideline waiting for some sort of price discovery and a bit more certainty around valuations. So it's been a slow process and it's ongoing at the moment. So I can't give you too much more color on that yet. Clearly, if we don't transact on that, we will look to see there's some other assets to move maybe some smaller assets that we could move. We want to continue to maintain, I guess, our debt balance at about the same sort of level rather than increasing it and to fund some of the developments, we look to recycle some capital out of probably some of the smaller assets then if we don't move Australia Square.

Your next question comes from Sholto Maconochie from Jefferies.

Just a couple from me. Just on Australia Square, is that assuming guidance to sale in the last quarter or in the guidance number?

Sale of Australia Square wouldn't need the numbers materially. So we haven't assumed it's sold in the second half at this point in time, but it wouldn't make a material difference, [ to be quite honest ].

And I think it was already added to the lease incentives will check up in the second half from leasing deals down the first sort of land in the second half, is that correct?

Yes, that's correct. We will see a tick up in them. They can be related to deals that were done in the first half or even last year. It's just when the incentives start to flow. So yes, you will see them tick-up in the second half.

And then just on the hedging, probably one for Anastasia here. I noticed the hedging before that 78% hedged, now you have sort of 98%, but the hedge rate has gone up materially sort of running at 2.5% and 3.1%. So you've increased hedging, but at higher rates, that's been -- and plus the higher floating would be the main driver of that higher cost of debt in the next sort of 12 months?

Yes, we have. We've lengthened the duration of hedging, and we have materially increased it. We felt that there was another step change around expectation globally for rate rises. And in fact, that applies obviously to our central bank, although I'd say we have been a touch more modest than what it could have been. We were just very pleased to be getting on hedges around the 3.5% level compared to where you're seeing market at around 4%.

Okay. And then just an update on Darling Park. A few months back, it looks pretty good with the fit out. There's also leasing going on getting that leased up.

So with Darling Park, we've leased about 5,000 tons per square meters in the complex over the first 6 months. The rest of the CBA space is all presented in a minute ago and its active engagement from the number of tenants in discussions on that on some of that vacancy right now.

Okay. And then just finally, I think Bob said to see ongoing. Is that announced before the end of the year in terms of things going a while now?

Look, all I can say at the moment is the Board is working diligently to bring, I guess, closure as soon as possible. Clearly, there'll be announcement at the appropriate time. I've given my commitment to the Board to work through a transition process, and I remain committed to doing that.

And then finally, just on the -- you talked about if you don't see Australia Square. Would you look at some JVs to grow they've done a good job on the funds management side to potentially put some assets into JVs to get some management fees if you don't sell Australia Square?

Yes, that is certainly an option. But I would say at the moment, capital just generally is still sitting on the sidelines. And so that is something that we would like to have pursued even this year, but we found that capital is still very cautious and sitting on the sidelines. But it is an opportunity for us when I think you see cap rates and on yields settle. I think that is an opportunity for us to explore.

Your next question comes from James Druce from CLSA.

Just following up on Caleb's question around the increase to retail NOI of AUD 15.5 million. Is there anything else in that? Is there any pickup in ancillary income that we should be thinking about?

James, predominantly the results come of the performance of Melbourne Central and the recovery. So almost 50% of that is coming out of Melbourne Central.

Melbourne Central, I think we've got 3 or 4 vacancies now. And this time last year, I can't remember, but it was quite elevated, and we were going through -- it was rebuilding, but foot traffic was still lower. It's all going very well now. You're back to 3 full vacancies in the center. And clearly, that's led to a stronger NOI performance out of the asset in the first half.

Can you talk about any month-to-month sales trends that you're seeing in the final quarter for June, sort of following on from Grant's question?

James, from a month-to-month perspective, the second quarter was slower than the first. And as I said, we ended the second quarter at 8% up and June was 5% up. And as I did mention, July is looking to be from what we see today, plan on where we were last July, but last July was the highest performing highest comping month of '22. So a flat result is still positive in my mind.

Your next question comes from Alex Prineas from Morningstar.

Just on the retail portfolio. I'm just interested in the sensitivities there if we did see a deeper recession. Can you comment on things like lease expiries over the next 18 months sales-based rent and maybe the strength of the balance sheet of the tenants. How sort of sensitive is that portfolio looking maybe compared to how it has performed in previous recessions.

Maybe just deal with the lease expiry first. So we average around about 15% of the portfolio comes up each year. WALE is around about 4 years. But next year, we do have a bit of an elevation of about 20%, and that's because of some of the COVID renewals are coming off next year, but I continue where we are today, with very high occupancy and very strong leasing demand. I think that 20% is an opportunity for us compared to a stabilized year. And sorry, the second half of the question?

Just sales based rents and the strength of the balance sheet of the tenants.

Yes. Sales based rent, certainly not -- that's not how our portfolio is made up all of our assets, all of our centers, all of our leases have a fixed percent escalation. So we don't really rely on sales-based turnover. But obviously, we do benefit when we have extremely strong sales, which we have had for the last 18 months. And I think the last question was in relation to the health of the retailers today. And 2 things as I said, by having exceptionally long strong sales over the last 18 months. They've enjoyed high inflation. They've been able to pass their cost on to the consumers. So we've actually had 3 years of sort of elevated profitability. And I think that leading into some slowdown will put them in reasonably good shape. Well, I should say, sorry, Alex, with pretty low occupancy cost today at about 15.7%.

So in general, I think is in much better shape than when they came into COVID quite frank. We are optimistic about, I guess, a soft landing for the economy in Australia. And we think given house prices seem to have stabilized, unemployment remains low. There's a number of factors there that we think retail will continue to perform well for us.

Your next question comes from Lauren Berry from Morgan Stanley.

It's Simon Chan. I've got an elementary question. If I look at the balance sheet, the other receivables number has come off from AUD 175 million 6 months ago to AUD 57 million, I'm sure there's a reason for that movement. Can you explain please, Anastasia.

Yes, sure. We have had a few sites out at Rouse Hill and at Sydney Olympic Park that have been the subject of a New South Wales Government Compulsory Acquisition Program. And some of those sites have settled in full, and some of them we've received 90% of the proceeds. And that was flagged at the beginning of the year when we said we had a further sale proceeds coming in of just over AUD 300 million. But because it was the Compulsory acquisition moved from investment property at the time the government [ gazetted ] the purchase to other receivables and then we've since collected cash.

We paid 90% because we are challenging some of the assumptions on a couple of evaluations.

And just one more on retail leasing. 343 deals completed. How many of those were Melbourne Central?

The deals that we completed at Melbourne Central for the year is at AUD 52 million of the AUD 340 million.

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

Thank you, and thanks, everyone, for joining the call. We will catch-up with many of you guys over the next few days, and I'm sure you'll have more questions for us at that time. So thanks, everyone, for joining the call, and we look forward to speaking to you then.

That does conclude our conference for today. Thank you for participating. You may now disconnect.