Vicinity Centres (VCX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Vicinity Centres FY '22 Annual Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Grant Kelley, CEO and Managing Director. Please go ahead.

Good morning, and thank you for joining us for Vicinity Centres Results Call for the 12 months ended 30 June 2022. Before we begin, I'd like to acknowledge the traditional custodians of the lands on which we meet today and pay my respects to their elders past, present and emerging. And I extend that respect to Aboriginal and Torres Strait Islander peoples on the call today. Joining me on today's call are Peter Huddle, Vicinity's Chief Operating Officer; and Adrian Chye, our Chief Financial Officer. And I'll start today on Slide 5. FY '22 was a year of recovery and substantial progress at Vicinity. Our results highlight strong operational and financial execution in a recovering retail landscape where consumers continue to show confidence and capacity to spend and retailer confidence was robust. We made significant progress against our long-term strategy this year. Our core retail portfolio performance was strengthened by driving high-quality asset management, including the introduction of on-trend retailers and the success of the luxury retail category across our Flagship, Outlet and CBD centers. During the year, we also made strategic decisions to enhance the overall quality of our portfolio, upweighting our leadership position in the growing Outlet sector, with the acquisition of a 50% interest in Harbour Town Gold Coast and divesting our 50% interest in Runaway Bay at an 18% premium to book value, while also delivering earnings accretion. We invested in our funds management and third-party capital business, notably with the appointment of David McNamara in February this year, and have been able to participate in potential opportunities in a far more targeted and focused manner. And finally, we have transitioned to execution of our retail and mixed-use development pipeline, as many of you would have seen at our development showcase in June. As Adrian will discuss in more detail shortly, our financial results in FY '22 highlight our continued recovery from the pandemic. We delivered statutory net profit after tax of $1.2 billion, representing a $1.5 billion uplift on the prior year. The Board declared a final distribution of $0.057 per security, bringing the total FY '22 distribution to $0.104, representing a payout ratio of 95.3% of AFFO. We maintained our disciplined approach to financial stewardship and, despite the disruption and cost of the pandemic, preserved our strong balance sheet and credit metrics. Gearing remains at the low end of our 25% to 35% target range, and we enter FY '23 with around 85% of our drawn debt hedged. Pleasingly, the uplift in valuations in FY '22 has supported a strong uplift in our NTA. From a retail trading perspective, while our 2 largest states, Victoria and New South Wales, were in lockdown for much of the first half of the year, we observed a significant and sustained rebound in retailer confidence and retail trading conditions in the 6 months that followed. Demonstrating the underlying resilience of the Australian retail sector, sales across our portfolio in the second half of FY '22, surpassed pre-COVID levels by nearly 16% despite the outbreak of Omicron in late December 2021. As Peter will talk to you shortly, this profound recovery in the retail sector after the lockdowns in early FY '22 underpinned another 6 months of positive leasing momentum. And finally, as I'll describe in more detail later, we are pleased to, once again, provide earnings guidance for FY '23. Turning now to Slide 6. And in the 6 months since we last showed this slide, there has been a shift in the macroeconomic landscape and near- to medium-term outlook. Consumer sentiment is being impacted by rising inflation, associated interest rate increases and reducing confidence in the economic outlook both in Australia and abroad. That being said, at a broader retail industry level, falling consumer confidence has not dampened consumer spending. And from a Vicinity perspective, we continue to observe elevated retail sales in our centers relative both to prior year and pre-COVID levels. With a record low unemployment rate, historically high numbers of job advertisements, and with household savings continuing to be more than 10%, which is still well above the 5-year average, we believe that any potential negative impact on consumer spending may be limited. Looking forward, while we are mindful that the immediate outlook is uncertain and ultimately depends on where and when inflation peaks, we cautiously anticipate a soft landing for the Australian retail sector over the next 12 to 18 months. I'll now hand you over to Peter Huddle, who will provide an overview of our operating performance for the full year.

Thanks, Grant, and good morning. I will start on Slide 8 with a review of our retail trading conditions. Similar to FY '21, we would describe FY '22 as a tale of two halves. The majority of the first half was materially impacted by prolonged lockdowns in our 2 largest states, Victoria and New South Wales, whilst the second half reflected a more normalized period despite some ongoing impacts from Omicron across the country. The important point, though, is that the momentum of recovery observed in the first half accelerated in the second half. We saw a steady improvement in visitation and shoppers continue to spend, on average, 30% more per visit than pre-COVID. Shopper preference for omnichannel retail, which combines the power of the physical store with an online presence, was further supported by a contraction in the rate of online sales growth between October '21 and June '22. The buoyant retail trading conditions in the second half underpinned a strengthening in retailer confidence, which in turn, drove strong leasing activity, particularly through April to June. While CBDs continue to improve, visitation remains at below pre-COVID levels. a prolonged return of CBD office workers has impacted mid-week traffic. However, weekend trade in the second half returned to near pre-COVID levels as day shoppers returned en masse assisted by city activities and events. Turning now to Slide 9. The trend of annual retail sales growth across our portfolio since FY '19 also shows a clear recovery is evident. We have highlighted the second half of FY '22 to further depict the return of consumer confidence and sales outside of government mandated lockdowns. Total portfolio sales in the half increased by 11.5%. And while the bulk of this growth was observed across our Victoria and New South Wales centers, the specialty and mini major sales in other states also continue to grow despite coming off a high growth of 13.4% for FY '21. More specifically, as we emerge from the pandemic, we have seen shoppers keen to refresh their wardrobes, indulge in high-value items such as jewelry and luxury goods as well as return to in-center dining and entertainment activities. As part of this recovery, it's been particularly pleasing to see the strong recovery in SME retailer sales after a challenging 2 years. Turning to Slide 10. Together with our rigorous focus on collecting due and overdue rent, the sustained strength of retail sales in the second half led to stronger cash collections. In FY '22, we collected on average 91% of gross billings. And in the second half, we collected 93% of gross billings. With the expiry of the SME Codes in New South Wales and Victoria in March, we have steadily completed required negotiations with SME retailers and forecast conclusion of those terms prior to the end of the calendar year. For non-SME retailers, whose leases are not governed by the code, we are substantially more progressed in terms of providing targeted assistance where required, resulting in materially improved financial outcomes relative to those in the pandemics of FY '20 and '21. With SME retailer sales performance broadly in line with non-SME specialty sales, the collection of current and overdue rent for SME tenants improved from 66% of gross billings in the first half to 80% for the full year. Post expiry of the codes in New South Wales and Victoria, we have seen minimal new vacancies, with occupancy slightly increasing to 98.3%. Having said that, we will continue to partner with and support our SME retailers and particularly those in CBD centers. More broadly, cash collections from our national and major tenants move closer towards pre-COVID levels, particularly in the second half. This again reflects not only the strong retailer sales environment, but also our disciplined approach to if and how we provided rental support to non-SME tenants. Consistent with the prior year, retail administrations remain low, and we've continued to monitor the health of retailers. Turning to Slide 11. We continue to focus on driving high-quality leasing outcomes that not only locked in future NPI growth, but also reflect and enhance the quality of our assets. In the year, we completed 1,378 leasing deals. The majority of these were completed in the second half despite a meaningful moderation in leasing activity in January and February 2022 due to both seasonality as well as the outbreak of Omicron. Once the risk of potential lockdowns abated in March, deal momentum accelerated. In fact, the number of deals completed in June 2022 was nearly 50% higher than the number completed in June 2021. Adding to this, if we take the total managed portfolio, including all project leasing deals, the number of leasing transactions surpassed 2,000 for the year. We leased 374 vacant stores, equating to more than 52,000 square meters of GLA over the year, which in turn supported a modest increase in FY '22 occupancy rate to 98.3%. Leasing spreads continued to show positive momentum, with the average leasing spread for FY '22 improving to negative 4.8% versus negative 12.7% in FY '21. Of all new leasing deals agreed in FY '22, 71% were negotiated with fixed annual increases of 5%, and cumulatively, 94% of all new deals were negotiated with fixed annual increases of at least 4%. Importantly, the average new lease tenure has increased to 5.1 years, reflecting our deliberate focus on repositioning our assets with the right offers that produce recurring growth for the long term. And turning to Slide 12. With the recovery gaining momentum, retailers are positioning themselves for the future. This page shows a selection of new stores that have opened across our portfolio during the year. Vicinity is a key partner to luxury brands. Breitling and Balenciaga are expanding their presence in Australia, taking advantage of strong demand for luxury goods. As with other flagship retailers seeking prominent positions in premium CBD assets, we are excited to have opened Australia's first NBA Store at Melbourne Emporium. We remain focused on our CBD assets to ensure that we capture flagship stores and first-to-market offers that create a retail vibrancy that is second to none. The expansion of quality food offers continues to be a key driver for Vicinity. We have recently opened a superbly finished French browser called Manon at QVB, elevating the offer and assisting the return of trade for this CBD asset. We have worked with growing Melbourne fresh food operator Sacca's Fine Foods to support their expansion plan. After a successful few years since we brought them to Altona Gate, we have further expanded that store and opened a new flagship store for them at Broadmeadows, replacing in part an older discount department store. Importantly, we continue to elevate the offer of our market-leading premium Outlet business, including the expansion of Tommy Hilfiger at DFO South Wharf on this page. Our Outlets business has played an important role through the pandemic and generally performs well through the cycle. Moving to Slide 13. Our retailer-first program has proven to be a successful strategic initiative, with Vicinity increasingly being recognized as a partner of choice for growth-orientated retailers. Of note, our national retailer tenants ranked Vicinity #1 on the retailer Net Promoter Score and #2 overall for tenant satisfaction, which compared Vicinity to 10 retail peers. Our tenant satisfaction score reflects our progress on building stronger and more long-term relationships with our retailers and enhancing tenant experiences. Given that these results occurred in a year with major lockdowns demonstrates the team's commitment to being customer focused. Over the past 12 months, we had around 333 million customer visits through our centers. The persistently strong spend per visit this year has in part been driven by our teams, not only creating an attractive and safe retail environment, but also implementing tailored and global award-winning marketing programs that were highly targeted towards driving retailer sales and enhancing experiences across our diverse portfolio. Turning now to development on Slide 14. I'll provide a brief update on progress made across our $2.9 billion pipeline since our development showcase in June this year. We continue to move from planning to execution. And in August, we received all formal approvals to commence our large-scale fresh food retail and One Middle Road office development at Chadstone. This project will further complement the 2 existing projects already commenced during the period, being the refurbishment of Chadstone Place to introduce Officeworks' new headquarters as well as the development of a new dining and entertainment terrace, which will elevate the leisure experience to be delivered at Chadstone in quarter 3 of FY '23. Our retail redevelopment of Bankstown Central are on track to complete later this year. The center's offering will be notably improved with the introduction of a new Coles supermarket and fresh food precincts as well as new stores, including Uniqlo, Glue and a Services Australia center. At Box Hill South, Coles is expected to open its new store in the coming month, and we are bringing a number of dual-fronted restaurants, while, at the same time, remixing the tenant offer and upgrading the mall finishes. Concurrently, the development of a 4,000 square meter 4-level podium for Hub Australia is on track to open this financial year. We believe Boxer Hill is a great location for co-working being a key metropolitan hub with strong transport links. We continue to progress upgrades across our portfolio to ensure all of our assets remain attractive and relevant to their catchments. More recently, we completed major tenant reconfigurations and/or ambient upgrades of Broadmeadows, Mornington Central and, shortly, at Northgate. On to Slide 15, and we have more projects forecast to start in FY '23. Outside of Chadstone, leasing activity has commenced for the Bankstown Exchange office towers where we have received development approval. We are also nearing commencement of the lower ground redevelopment of Chatswood that will deliver a significantly enhanced fresh food precinct and dining offerings, including quick service restaurants. This will prepare the asset for the larger retail and commercial development planned to commence in FY '24, where an amended development application has been lodged and pre-leasing has materially progressed. At Galleria in Perth, we plan to substantially refurbish the existing center in addition to introducing an enhanced dining and leisure precinct. Pre-leasing is well advanced, and we expect to commence the project during this reporting period. We continue to invest in smaller, more tactical projects across the portfolio that include aesthetic renovations, replacement of underperforming major retailers and the introduction of food and entertainment offers to meet market demands, such as Armidale and Northland. Finally, progress on our 6 major mixed-use destinations continues. Given we own the land parcels earmarked for development, the pipeline is able to be flex up and down in order to preserve risk and return parameters of our projects and pace the capital deployment, thereby ensuring that we can maintain our strong balance sheet credit ratings and disciplined approach to paying distributions. Thank you, and I'll hand the call over to Adrian to discuss our financial performance.

Thanks, Peter, and good morning. I'll start on Slide 17. Vicinity delivered a strong financial result for FY '22. Statutory profit for the year was $1.2 billion, an uplift of approximately $1.5 billion compared to FY '21. FFO was up approximately $39 million or 7.1% on the prior year, driven by an 8% uplift in net property income to $803 million. NPI growth largely reflected the sustained strength of retail sales and improved negotiation outcomes with retailers. This led to lower waivers and provisions in FY '22 and a strong rebound in cash collections, notably in the second half of the year. Pleasingly, improved cash collection outcomes were achieved despite a high proportion of the portfolio being subject to lockdown in FY '22. Supportive retail trading conditions as well as our rigorous focus on debt collection also enabled a $63 million reversal of prior year waivers and provisions, which increased $11 million since the first half. NPI also benefited from growth in base rents and the continued recovery in ancillary income. Outside of NPI, external management fees increased as we ramped up our development projects and net corporate overheads and net interest expense increased mainly due to one-off items in the prior year. Due to the higher volume of leasing activity and a catch-up on previously deferred maintenance CapEx, FY '22 AFFO capital increased by $28 million. The FY '22 distribution per security of $0.104 reflects an AFFO payout ratio of approximately 95%. Turning now to Slide 18. For the 6 months to 30 June 2022, the portfolio delivered a net valuation increase of $233 million or 1.6%. Combined with the first half net valuation gain, the gain for the full year totaled $554 million or 3.9%. Positive valuation outcomes for this half were recorded across all center type and state, while the weighted average cap rate tightened by 5 basis points to 5.3%. The majority of the valuation increase was attributable to income growth. Our subregional and neighborhood portfolios recorded the strongest growth, highlighting the continued resilience of nondiscretionary-based retail and investor appetite for these types of assets. Outlet assets again saw solid valuation gains, which is almost entirely driven by income growth. The value of our CBD portfolio remained steady this period, which, considering the continued impact of the pandemic from CBDs more broadly, was a pleasing outcome. While CBD traffic remains below pre-COVID levels, leasing activity is robust, and we are confident in the ongoing recovery of our premium CBD centers. Turning to Slide 19 and our capital structure. FY '22 was an active year from a capital management perspective. We successfully issued a 6-year $300 million inaugural Green Bond. We extended $475 million of bank debt after FY '28, and we optimized our liquidity through the cancellation of $800 million of bank debt. Our capital management activity in the year further strengthened our balance sheet. Our weighted average maturity is 4.8 years. We have increased diversity of our funding, and we have no debt maturities until FY '24. Gearing of 25.1% is at the low end of our 25% to 35% target range, and we have $1.4 billion of available liquidity. Our consistently prudent approach to managing our capital structure underpinned our approach to hedging. We are currently 85% hedged and have hedged 80% of our expected drawn debt for FY '23, with a very modest step down in FY '24. These relatively high hedging levels provide us with increased certainty in a volatile interest rate environment. Finally, we retained our strong investment-grade credit ratings of A and A2 with Standard and Poor's and Moody's, respectively, both with a stable outlook. I'll now pass back to Grant.

Thank you, Adrian. Turning now to Slide 21, and sustainability is fundamental to the successful execution of our strategy and the long-term performance of our business. During FY '22, we strengthened a number of our sustainability credentials, and our approach continues to be anchored by our objective of driving shared value for all stakeholders. Once again, Vicinity improved its ranking on the Dow Jones Sustainability Index from 7th to 5th. We are also ranked Oceania sector leader and #3 globally in the listed retail shopping center category by Global Real Estate Sustainability Benchmark, or GRESB. We published our Second Modern Slavery statement as well as our Second Innovate Reconciliation Action Plan. We were listed in the top 50 giving large list, and we became a supporter of the task force on climate-related financial disclosure. We continue to make good progress towards our net zero carbon target by 2030 and installed another 3 solar arrays in our industry-leading solar investment program. And finally, as Adrian mentioned, we leveraged our strong sustainability credentials and investment in sustainability to date by completing our first Green Bond. Turning now to Slide 22 and, in summary, FY '22 was a year of recovery and progress at Vicinity. Our results highlight strong operational and financial execution in a recovering retail landscape, where consumers continue to show confidence and capacity to spend and retailer confidence was overall robust. Our results also demonstrate that Vicinity remains the partner of choice for retailers who are looking for opportunities to grow. And as we look ahead, we will continue to invest in our portfolio of assets to drive mutual growth for both landlord and tenant. We have demonstrated our willingness to recycle capital from well-optimized assets into higher growth assets with the acquisition of Harbour Town and the subsequent sale of Runaway Bay, which collectively delivered earnings accretion in FY '22. Our development pipeline represents an exciting phase of growth for Vicinity, and we have a number of important retail and mixed-use projects commencing in the coming year. Our flexible balance sheet is a source of strength and competitive advantage. We take a prudent approach to financial stewardship, where capital allocation is anchored by the maintenance of our credit ratings and focus on paying distributions. As described earlier, while we are mindful of inflation and rising interest rates, we are still seeing elevated retail sales trends in our centers, and we cautiously anticipate a soft landing for the Australian retail sector. Nevertheless, we will continue to provide highly targeted support to retail partners who continue to be impacted by the pandemic, notably SMEs and CBD retailers. And at the same time, we'll actively partner with retailers looking to expand in our centers to drive mutual growth for both tenant and landlord. And finally, to our earnings guidance FY '23, and providing there is no material deterioration in existing economic and COVID-related conditions, our expectation is that FFO per security for FY '23 will be in the range of $0.130 to $0.136, with AFFO per security in the range of $0.109 to $0.115 and distributions in the target range of 95% to 100% of AFFO. Importantly, adjusting for waivers and provisions written back in FY '22, our FFO per security guidance for FY '23 represents between 10% and 15% growth. Against the backdrop of retail sector resilience, we enter FY '23 with confidence in our continued recovery and strategic execution across our core retail operations, retail and mixed-use development projects and our funds management business. Thank you. And with that, we are happy to take any questions.

[Operator Instructions] Your first question comes from James Druce with CLSA.

Can you hear me?

Yes, we can, Lee -- sorry, James. Over to you.

Yes, so just on the stabilized net property income number, where does that sit now?

Yes, James, I might take that. I think the way to think about maybe a stabilized NPI is to think about the FY '22 number and then adjust for probably the COVID impacts. So there's the $63 million, I think, that we have provided in terms of write-back and then the $94 million of waivers and provisions. And then I think on top of that, you probably want to be thinking about ancillary income in the year. We're probably still about 15% down on ancillary income. So if you take those things, you'll probably get to a kind of normalized NPI number.

Okay. And do you mind just reminding me where ancillary income, what was sort of order of magnitude that is?

Yes, it's about $105 million on a stabilized basis. For FY '22, we were at about $88 million.

Okay. That makes sense. And in your prepared remarks, it sounded like for the CBD retail assets, the day shopper had replaced the mid -- sort of the drop in traffic from people coming to CBD. Is that what's happened there?

James, it's Peter. What we said in the commentary is that particularly on weekends and Melbourne and to a lesser degree, Sydney is the day shoppers are coming back to essentially they're about the same numbers as precured levels. The situation with the CBD is midweek traffic is still substantially below 2019, but weekend traffic is heading towards more normalized numbers that we would expect.

Okay. Yes, that makes sense. And then just maybe in your guidance, we've seen leasing spreads, the second half, I think, was sort of negative 3%. The outlook for that is for FY '23. There's a bit of uncertainty around, but where do you see that trending? Can that continue to tighten? Or have we sort of maxed out that number?

Joe, it's hard to forecast. So all we can say is that essentially, it's been a positive momentum in terms of leasing spreads over the last 3 reporting periods. So we're seeing good growth in leasing activity, good retailer demand, more positive leasing spreads than obviously in the pandemic period. And subject to where sales end up, we'd hope that, that would continue.

And I think, for the guidance purposes, James, what we're assuming in that guidance is a continuation of that positive trend, probably reflecting the leasing spreads that you're seeing second half of the year.

Okay. That makes sense. And then -- for FY '23? Do we have a number for that?

Yes. Look, I think we are still expecting to be providing target rent relief, particularly to our CBD, SME retailers as required. I would be expecting probably a similar level in '23 as we provided for the second half of '22, which is around $30 million.

Your next question comes from Lou Pirenc with Jarden.

Can I just follow up on that? Did you say that the waivers and provisions were still $30 million in the second half? Because I thought you were at 96 million for the first half and you're 93 for the full year. So how do I reconcile that?

Yes. That's right. So I think the good way to think about that is 96, which we said at the half year, we then provided or we've provided, I guess, in terms of waivers and provisions another 30. The FY '20 so the half year, we're probably retack about $30 million, so that's offset that amount. So that's probably giving you a flat outcome on a full year basis.

Okay. Then also, I mean, with what's happening here in terms of you're quite positive on ancillary income, clearly, fixed rental growth. Your re-leasing spreads are improving. What are the negatives here to only get to that 1.5% or so growth, FFO growth in the mid-range. Is it just cost of debt? Or should we expect any big increases in overheads or drops in external management fees?

Yes. Lou, it's Grant here. There's a lot of moving pieces in guidance, probably even more than the 3 or 4 that you just mentioned. I think it reflects overall a balanced view of the potential ups and downs that could eventuate. One of the keys that Adrian touched on is we're not assuming any write-backs but we do have, of course, watching brief, I suppose you could call it, on the macro environment. So it's a fairly complex guidance equation. Happy to go into that perhaps off-line. But I think beyond our remarks today, it's probably appropriate to leave it at that for the moment.

Your next question comes from Stuart McLean with Macquarie.

First question is just on the rental relief you're expecting to move forward into FY '23 for CBD office foot traffic doesn't appear to be improving substantially. Is this just a new normal number you'd expect to come through and be hitting the P&L on a go-forward basis? Or do you genuinely think that we can move past this rent relief concept for CBD assets at some stage down the track?

Stuart, it's Peter. Look, we are strong believers in the mid- to long-term CBD assets. So I don't think it's a new normal number that's going in, but clearly, we're still in recovery with CBDs. International borders have only just recently opened. The SME Code is only expired essentially in March with mediation really only expired in June. And so from our point of view, we've provided some targeted assistance, particularly for SME retailers in our CBDs to -- there are quality retailers -- to hold that tenant mix together as we start to build traffic. From our position, we expect more normalized traffic to occur in the CBDs around FY '24, and that's why we're guiding for additional assistance there for FY '23.

Okay. And second question is just on development. Can you just talk to the returns that you're expecting to achieve at the Chatswood development? And so for the major development, just not the kind of more minor portion that's going to kick off this year as well as, at Galleria, what's the spend and the targeted return?

Stuart, look, we haven't given specific guidance in terms of the returns of either developments. I might have a chat to you with reference to the development showcase that we did in June, which we gave some guidance on classifications for retail categories. But generally, on our retail projects, our stabilized yields are around about 6% with IRRs that are closer to 9% to 10% for retail. And that would cover essentially both of those developments that you would -- you just spoke about. But clearly, the Chatswood development, what we're planning to commence this year is a smaller CapEx development. And it's in the range of about $30 million to $40 million from VCX dollars and has about those type of return hurdles to them. That really prepares the center for the larger development, which we plan to commence in FY '24.

Okay. So both of those work at that 6% return expectation?

Broadly.

Okay. And then just on those as well. Is there any downtime from developments that we need to be thinking about for FY '23 earnings? And how do we think about that into FY '24 as well if the major Chatswood development starts coming on, please?

Yes. I might take that one. FY '23 loss of ramp is probably in the $10 million to $15 million level, which is still lower than probably our typical level of lost ramps. Just given the nature of the projects, Chadstone in particular, we're not expecting to lose a whole lot with the entertainment and leisure precinct development currently on at the moment. FY '24 would tick up a little bit. So I'd be expecting something probably in the $20 million to $25 million mark in terms of loss of rent.

Just one follow-up there. The $10 million to $15 million you expect in '23, what's in the base in FY '22? Is there already a number kind of in the base of $10 million to $15 million limited delta?

That's right. Very similar number for '22.

Okay, fantastic. And just a final one for me. Just maintenance CapEx and tenant incentives came at the bottom end of your range, $100 million to $110 million. Looks like guidance assumes $100 million again. Can you just talk to how you're thinking about that line item on a go-forward basis, please?

Yes. Look, I think there's 2 components, obviously, maintenance CapEx. I think there was a bit of catch-up capital that we assumed would come through. We've probably been a little bit more judicious, I think, around maintenance CapEx and really focus the expenditure, and that's why that's come down a little bit. And we're expecting that subject to cost increases, et cetera. But we expect that to be around the $50 million mark next year as well and probably on a normalized basis. In relation to incentives, I think what you've seen in the result is a very strong retention rate. So that's also led to a slight reduction in our expectation earlier in the year. And we're expecting that level going forward as well, assuming that the continued strong operating conditions.

Your next question comes from Grant McCasker with UBS.

Just a question on the leasing. I think holdover seem to have ticked up to around 9%. Is that development impacted? Or any sort of further information you can provide on that?

Grant, it's Peter. So essentially, 9% in the appendix there, that includes all deals, include some office deals, includes deals that we haven't documented yet but they've been agreed. So probably the real number to think about, which is the trend of number we go through is about 10% of leases in hold average. It's about 7.3% of rent. And if you -- if we trended that against prior results, it's broadly similar, if not slightly better than about the last 3 years. So we can go through it in more detail, maybe offline, Grant, but that's holdouts in reasonably good shape. About 33% of them are held over on behalf of the synergies. So in other words, holdovers that we want to have vacant possession for in the short term for development activity.