Vicinity Centres (VCX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Vicinity Centres FY '24 Interim Results Call. [Operator Instructions] I would now like to hand the conference over to Peter Huddle, CEO and Managing Director. Please go ahead.

Good morning, and thank you for joining us for Vicinity Centres results call for the 6 months ended 31st December 2023. Joining me on today's call is Adrian Chye, our Chief Financial Officer. Before we begin, I'd like to acknowledge the Traditional Custodians of the lands on which we meet today, and pay my respect to their Elders, past and present. I extend that respect to Aboriginal and Torres Strait Islander peoples on the call today. I will start today's presentation on Slide 5. We've had a strong start to the first half of FY '24, with the hallmarks of today's results demonstrating execution and strategic progress, and continuing the momentum that we set in FY '23. There is no doubt that trading conditions in the first half have been more resilient than expected. And in this context, we have once again, acted at pace to lock in long-term leasing deals in anticipation of more challenging trading conditions ahead. We've done this whilst remaining laser focus on our long-term growth priorities and the strength of our balance sheet and credit metrics. Adrian will talk to the financials in more detail shortly, but at a high-level, Vicinity delivered a net profit after tax of $223.5 million for the 6 months, while headline FFO was slightly below the prior year at $345.6 million. Adjusting for one-offs, FFO was up 2.9%. Comparable NPI was up 4%, underpinned by portfolio rental growth, improved occupancy and continued recovery of our CBD assets. Leasing spreads were strongly positive and our occupancy cost ratio continues to demonstrate the resilience of current rents, despite near-term sales uncertainty. Our occupancy is nearing [ pre-pandemic ] [Audio Gap] while moderating over the period, retail sales for the first half remained positive, increasing 1.5%. And the productivity of our specialty stores is up more than 11% since pre-pandemic. And finally, the Board declared an interim distribution of $0.0585 per security representing a payout ratio of 83.7% of AFFO. Underpinning our financial and operational results today is execution against our strategy and our laser focus on being a high-performing property-led organization. While we've had a strong start to FY '24, we have also had a busy start. The pace at which we now execute our strategy is building and the momentum within the business is a reflection of not only the talent we have, but the cohesion, collaboration, and confidence that is constantly growing. We have taken meaningful steps to enhance our investment portfolio. At its core, our portfolio strategy is to increase our exposure to premium malls and premium outlet centers. And at the same time unlock our retail and mixed-use development opportunities. We announced the acquisition of the remaining 49% interest in Chatswood Chase, an iconic premium mall on Sydney's North Shore, with significant growth potential. We're in the final stages of the major revitalization of Chatswood's lower ground fresh food and dining offers, with a number of stores already open and trading well. We have entered into contracts to divest assets totaling approximately $316 million more than covering the cost of acquiring Chatswood. And the redevelopment of Chadstone fresh food and market pavilion precincts is also progressing well with the new Coles and Aldi opened pre-Christmas. The hallmarks of delivering property excellence this half included a portfolio deal executed with the Coles Group across 20 sites nationally. This secures income for an additional 7 years on average, and deepens and extends an important strategic partnership. We have restructured our mall media business, partnering with Cartology, which is owned by the Woolworths Group. Commencing in the second half of FY '24, Cartology will operate over 1,100 digital small and large format advertising screens across our centers. This new hybrid model not only strengthens our relationship with an important strategic partner, but it delivers an earnings uplift and provides greater certainty of media sales income. And as I'll cover in more detail shortly, the portfolio metrics we have delivered enable Vicinity to enter a more uncertain trading period from a position of strength with even more resilient income growth profile. We are fortunate to have a strong balance sheet that can absorb future potential volatility, while at the same time enable investment in our long-term growth priorities. Our conservative gearing is a source of pride and competitive advantage, and is enabled by our proactive and disciplined capital management which includes new, more diversified sources of debt, asset divestments, and proactively managing near-term expiries. And finally at Vicinity, enabling good business is underpinned by our company being a safe, inclusive and thriving workplace for everyone. Our sustainability journey continues to evolve. We are on track to deliver our net 0 by 2030 commitment whilst at the same time we are readying ourselves and our systems for the new mandatory climate reporting requirements in FY '25. And in today's world of heightened cybersecurity risk, we are delighted to have our information systems and processes ISO certified during the period. Touching on our active investment strategy in a little more detail. Acquiring the remaining 49% interest in Chatswood was a momentous step forward for us. As a reminder, this asset is located in the most affluent catchment in Australia where household incomes are 32% above the Sydney average. And the center is proximate to bus, rail and metro transit lines. Since we announced the acquisition on 31st October last year, we have made even more headway into securing the income for the next major redevelopment of the center, having preleased 64% of the income via heads of agreement already. For a development which is expected to complete in the first half of FY '26, this level of precommitment is for us unprecedented. And as we have said before, the redevelopment of this asset is set to be the largest and most transformational project in the Australian retail property sector today, and in my view for the foreseeable future. And of course, while the strength of our balance sheet enables us to invest in our long-term growth priorities such as the acquisition and redevelopment of Chatswood, we have augmented our funding capability by recycling capital at attractive pricing, which not only creates value for security holders today, but also preserves the strength of our balance sheet and credit metrics for the long-term. In this context, in addition to the sale of Roxburgh Village, which we announced together with the acquisition of Chatswood Chase, we have also entered into contracts for the sale of Kurralta Central, in South Australia for $74 million, as well as Dianella Plaza in Western Australia for $76 million for a 31% and 6% premium to June 2023 book values respectively. We have also taken the opportunity to capitalize on strong interest in divesting a number of ancillary land parcels that are in the main non-income producing. In total, Vicinity has entered into contracts for and/or settled on assets sales totaling approximately $316 million, and which have collectively delivered a blended 13.2% premium to combine June 2023 book values. Turning now to the performance of the portfolio during the half. Reflecting the exceptionally strong growth in the prior period, as well as the cumulative impact of the 425 basis point interest rate hikes on the consumer, the portfolio recorded sales growth of 1.5% for the 6 month ended 31st December 2023. Over the half, month-on-month growth rates have progressively moderated, which can be explained by many factors including earlier and longer discounting in the lead-up to key trading events. It is also important to remember that in this half, we are cycling exceptionally strong growth in the prior period particularly across the luxury portfolio. A welcome and likely sustained offset to the near-term pressure is international tourism nearing pre-COVID levels, migration being at historic highs and our employment market remaining particularly tight. From a category perspective food related retail outperformed including fresh food, dining, and supermarkets as did sporting goods, cosmetics, and retail services. And CBDs continue to drive disproportionate growth with sales up 5.6% and of note occupancy of our CBD portfolio is now above 99%. We are delighted with the hard work from our CBD teams since the depths of the pandemic who have repositioned these flagship assets to their former vibrancy. Similarly, given the weight into the growth categories, SME sales are up 6.1%, assisting their financial resilience in a moderating sales environment. Perhaps unsurprisingly, shoppers continued to show a willingness and capacity to spend but a more discerning and value conscious. Highlighted by the strong patronage across the portfolio during the Black Friday and Boxing Day sales events. We remain Australia's largest luxury store landlord and since the end of the pandemic these retailers have enjoyed tremendous growth which has in turn delivered a 36% increase in productivity since December 2019 to around $70,000 per square meter. Same store luxury sales were up 0.7% for the half, which we expect is due to a normalization of growth and some softness in demand from the 25 year to 35 year-old customer cohort. While retail sales in the first half was stronger than we forecast, the performance of the retail sector in 2024 ultimately depends on the level of inflation when interest rates will peak the extent to which employment markets remain tight and the support of ongoing migration. Consequently, we retain our cautious outlook for the second half of FY '24. Over the past 18 months, the volume, quality, and tenure of leasing activity delivered not only demonstrates the important role of physical stores in sales channels, but also the fact that retailers are confident to look through the current cycle and position themselves for mid to long-term growth. Our occupancy rate increased 30 basis points over the half to now be above 99% which is approaching pre-COVID levels. We lengthen the term of new leases to 4.5 years which in turn together with the Coles portfolio deal added 0.3 years to our portfolio WALE. The structure, tenure, and value of rents reflects our laser focus on locking in traditional long-term specialty leases with fixed annual escalators despite a moderating retail sales environment. We achieved a leasing spread of 3.3% across 676 comparable deals and of these deals, 97% have fixed annual escalators of at least 4%, 83% of which have 5% increases. The Apparel & Footwear, Leisure and Jewellery categories performed exceptionally well post-pandemic. And while retail sales have moderated in the past 12 months, continued retailer confidence has collectively seen these categories deliver a high single-digit leasing spread in the first half of FY '24. Naturally, we saw strong leasing spreads across Chadstone and our outlet portfolio reflecting the strong tenant demand for these quality assets. A concerted effort to minimize income at risk resulting in a reduction in holdovers from 488, 12 months ago to 364 at December year-end. This represents circa 4% of portfolio income. And of the leases on holdover approximately 1/3 were deliberately held for strategic development purposes. In recognition of retailer confidence in our portfolio, tenant retention remained high at 77%. And after a period of elevated vacancy coming out of the pandemic and following some outstanding leasing activations, CBD occupancy is now 99.6%. Whilst we are maintaining our rental growth in a moderating sales environment, our portfolio specialty occupancy cost ratio of 13.7% remains at a level that we consider is sustainable as we enter a more uncertain retail sales environment. Of course, while we are very pleased with our leasing achievements in the first half, much like our outlook for retail sales we also have a cautious outlook for the leasing environment in the second half of the fiscal year. I'll now pass you over to Adrian to talk you through our financials.

Thanks Peter, and good morning. I'll begin on Slide 11. Statutory net profit for the year was $223 million. This was mainly comprised $346 million of funds from operations or FFO, partially offset by the net property valuation loss of $143 million. While FFO was 3.2% lower than the prior period, when we exclude the impact of one-offs FFO was up by 2.9%. The one-offs comprise reversals of prior year waivers and provisions and the impact of the sale of 50% of Broadmeadows Central last year, which collectively had a net $21 million impact on FFO growth compared to the prior period. Excluding one-offs, FFO growth of 2.9% was underpinned by comparable MPI growth of 4% in the half. This compares favorably to our initial expectations of comparable MPI growth for FY '24 of circa 3%. Driving the 4% comparable MPI growth was positive rental growth supported by our standard specialty lease terms which incorporate mainly fixed 5% annual escalators as well as positive leasing spreads. The continued recovery in CBDs, particularly the steady return of office workers and international arrivals nearing pre-COVID levels. And of course, as Peter noted, we have driven a continued improvement in occupancy with our leasing team having leased more than 16,000 square meters of vacant shop space. Other key movements on the income statement include net corporate overheads which were 6.2% lower, having benefited from lower insurance costs, a concerted effort to drive cost efficiencies, and increased capitalization of development costs. As expected, net interest expense increased 8.4% principally due to higher interest rates. Meanwhile, maintenance capital and leasing incentives are expected to follow a similar trajectory to prior years, with a second half SKU expected to deliver a total spend of approximately $100 million over the full year. Due to the favorable operational and financial outcomes in the first half, we have revised the FY '24 FFO and AFFO per security guidance to be around the top end of the ranges of $0.141 to $0.145 and $0.118 to $0.122 respectively. The distribution payout ratio for the full year is expected to be at the lower end of the target range of 95% to 100% of AFFO. Turning now to valuations. This half, Vicinity's portfolio recorded a 1% net decline in valuations, equivalent to $143 million, driven by an 18 basis points softening of cap rates. Importantly though, strong income growth offset 90% of the adverse impact from cap rate expansion and in isolation added 3% to portfolio valuation. Income growth was delivered across all center types. The subregional and neighborhood portfolios experienced a softening of cap rates, but steady income growth and strong gains on asset sales supported an overall valuation uplift. Since the start of COVID, the weighted average cap rate across the portfolio has softened approximately 40 basis points and income levels have been reset. With the prospect of interest rate cuts in the near future, resilient income growth being delivered and a pipeline of value creative projects, Vicinity's portfolio is well positioned. Turning to capital management. We maintained our disciplined approach to capital management, maintaining low gearing, actively managing debt expiries and our hedging profile, as well as retaining our strong credit ratings of A/stable from S&P and A2/stable from Moody's. As Peter mentioned, a great example of our prudent capital management approach was being able to secure sufficient asset sales to fully fund the acquisition of the 49% interest in Chatswood Chase and we were able to do this at favorable pricing. Our gearing currently sits at the low end of our target range at 26.3% and on a pro forma basis, after adjusting for the acquisition of Chatswood Chase and the sale of Roxburgh Village, Kurralta Central and Dianella, gearing is 26.6%. With the benefit of being highly hedged, our weighted average cost of debt increased 30 basis points to 4.9% and we expect it to remain at this level for the remainder of the year. Today, around 87% of our drawn debt is hedged. From a liquidity perspective, we have $1.4 billion of cash and undrawn debt facilities, which provides sufficient coverage to refinance our near-term debt expiries and all committed capital expenditure. Thank you, and I'll now hand back to Peter.

Thanks, Adrian. The majority of that committed capital relates to 2 major projects at Chadstone and Chatswood to avail premium assets both with significant growth potential. In today's environment of elevated cost of capital and ongoing dislocation in construction markets nationally, we remain intensely focused on prudent and pragmatic deployment of capital across our assets. Given the current market conditions, we do expect an elongated development pipeline that prioritizes higher value retail development which we have shown on Slide 21. The forecast cost of the development pipeline has slightly reduced despite taking 100% control of the Chatswood Chase development. Touching on Chadstone, where we are well progressed on the major mixed-use project comprising the 20,000 square meter One Middle Road office tower as well as the new fresh food and dining precinct. Prior to Christmas, we opened the new Coles and Aldi stores as well as 9 specialty food retailers. The Market Pavilion and alfresco dining precinct will continue to open in stages throughout the remainder of this year. Preleasing of One Middle Road is progressing well, and we look forward to updating the market once executed heads of agreement with tenants become unconditional. And construction is progressing with the tower forecast to commence tenant openings in the second quarter of FY '25. At Chatswood, we are nearing completion of the redevelopment of the lower ground dining and fresh food precincts. Already a number of new concepts have opened and old favorites reopened at the center all with significantly elevated fit outs that you can see here on the slide. The rest of the retailers on this level are expected to be trading over the next few months. As the lower ground completes, the exciting transformation of the upper levels will commence as we work in partnership with Multiplex, who executed a design and construction agreement with us in the second quarter of FY '24. In terms of risk management, as I stated earlier, we have negotiated an unprecedented level of precommitment for a retail project securing 64% of income by heads of agreement already, including key luxury retail groups. I look forward to providing progress updates on this project through to its scheduled completion in the first half of FY '26. Turning to our sustainability journey, we remain on track to achieve our net 0 by 2030 target. Our sustainability program was once again recognized by GRESB, which has seen Vicinity ranking #2 in Oceania in the listed retail shopping centers. We released our sustainability report in October last year, and naturally we have turned our minds to the impending change to mandatory climate reporting currently expected in FY '25. Over the past 12 months, we have made a concerted effort to ramp up our contributions to the community, which has seen increases in employee volunteering and giving, and at the same time we have expanded our important community grant program across additional centers. In summary, we have had a strong start to FY '24, and we are confident that the underlying resilience of our earnings growth profile will continue despite signs of moderating retail sales environment. We have demonstrated our willingness and ability to deliver short-term value by divesting assets at above June 2023 book values, whilst concurrently redeploying capital to our premium assets with significant growth potential. We've close to $1 billion of development projects either under construction or about to commence, we are laser focused on delivering targeted returns for security holders despite the challenges of Australia's construction sector. Our balance sheet is in great shape, and in the context of our committed capital spend, we are confident gearing will remain south of 30%, thanks to active capital management as well as select asset sales. And before I hand the call to the operator for Q&A, a reminder of Vicinity's investment proposition. In addition to our team of sector leading professionals at Vicinity, we have a prized portfolio of retail assets. Spanning 31 hectares and generating almost $2.7 billion in annual retail sales, Chadstone remains unrivalled in the Australian marketplace. This asset gives us tremendous competitive advantage and leverage across our retail asset portfolio. We have the preeminent CBD retail portfolio of any Australian landlord, and having actively invested in these assets, our CBDs continue to be a meaningful contributor to the resilience of our retail sales. We are the clear market leader in the growing premium outlet sector, a sector that we have continued to elevate the offer, resonating with an ever growing and important customer base. The diversity of our asset portfolio means we are able to selectively capitalize on attractive market pricing in certain segments. We have a number of metropolitan locations with attractive retail and mixed-use development opportunities, and where we have world progress master plan approvals. Further to this, we have a proven track record of managing through significant industry disruption and volatility while still delivering project returns that are in line with our investment feasibilities. Our strategic partnerships with 18 joint venture partners and almost 2,500 retailers across almost 6,700 stores are another source of competitive advantage and opportunity, especially in the context of the breadth and quality of our asset portfolio. And of course, an important contributor to the resilience and long-term growth of our business is our prudently managed balance sheet showcased by low gearing, high near-term hedging, a well-diversified debt book and strong credit metrics. Thank you, and I will now pass over to the operator for Q&A.

[Operator Instructions] The first question today comes from Solomon Zhang from JPMorgan.

First question was just on the corporate cost line. I'm just looking on Slide 11, about you call it a $2.9 million year-on-year reduction, but it's actually close to a $6 million step down on a half-and-half basis. Could you perhaps just bridge those costs on a half-and-half and maybe just talk about how sustainable those reductions are on an ongoing basis?

Thanks, Solomon. Adrian here. Yes, we have made a pretty significant effort in reducing costs. As we pointed out in the presentation, some of that is around insurance costs, which have reduced in the period. But as I think Peter had announced in prior results, we've also made some executive changes, and that's really contributed to ongoing savings in that corporate overhead line. They're the 2 main areas where we've saved costs in the business. Probably the other aspect is because we've ramped up our development spend as well, some of that development resource cost has been able to be capitalized as well into the asset. And so that's also brought down that net corporate overhead number.

Yes. Are there any SKUs impacting this full year, or is the first half a good sort of run rate?

From a corporate overhead perspective, we expect overheads to increase slightly in the second half, maybe $1 million or $2 million. More broadly, there is a SKU from an FFO perspective due to other items in the MPI line, and a bit more interest in loss of rent coming through as well in the second half.

Great. Just a last question from me, just on the valuation. So just looking at the passing yields from your first half, it does seem to sit well above your cap rate. I'm just getting 6.3% or so versus your cap rate of 5.65%. I understand there's probably some transactions impacting that, but can you just help us reconcile that? Our value is still using pretty conservative assumptions in your view, or are they about right?

Sorry, Solomon. Can you just repeat that 6.3%? Can you just repeat that?

Yes. So I've just gone the net property income divided by [ the ] balance, so your first half balance. So I'm getting about a passing yield of 6.3%, which is well above your cap rate of 5.65%. So just trying to reconcile that.

Yes, there's a few factors impacting that differential. One is around, we do hold leasehold properties, particularly in the DFO portfolio, so that tends to have a much higher passing yield than what would be reflected in the cap rate. There's also items like percentage rent, which we record in MPI, which typically may not get fully taken up in the valuation. Things like electricity on-sell and solar income tend to have a higher cap rate on them, 15%, 20% on those versus the cap rate. And there might be some other ancillary uses on the site that probably have a high cap rate. Some of the office assets, for example, have a high cap rate as well. And media as well, actually, is one of those where they tend to have a high cap rate. So all those things contribute to that differential in valuation versus what might be implied in the cap rate.

The next question comes from Lou Pirenc from Jarden.

Adrian, you started talking about it on the previous question, but can you maybe talk about some of the other moving parts, first half to second half? Is it asset sales? Is it -- I mean, you mentioned higher interest and higher overheads, but maybe quantify the loss rents that you're expecting in the second half as well versus the first half?

Sure. Yes, so the SKU that we expect from first half, second half is probably around $30 million. The break-up of that is really due to seasonality in the ancillary income business. Basically, stronger trade during Christmas for things like our CML, media and carpark. And so that's generally about a $5 million SKU on alternative income. The other bits are more around timing. So property expenses probably more heavily weighted to the second half. It's about $10 million in property expenses. Loss of rent from Chatswood, which we expect to [Audio Gap]. And then we've just got some higher interest expense to come through in the second half as well due to volume. So that'll contribute to that. At an underlying level, we actually expect underlying comparable MPI growth to be pretty stable year-on-year. It's probably just the other SKU items that are impacting that first half, second half SKU.

Right. So you expect the disposals to be largely neutral in terms of cap rate versus marginal cost of debt?

That's right. I mean, noting those divestments settle around March this year. So there's only a few months. So it's relatively neutral. Next year, on a full year basis, it's about $4 million.

Yes. And then maybe on disposals, where are you at? I mean, are you planning more disposals in the next 12 months? What should we be expecting there?

It's Peter here. We mentioned probably in the end of the, when we purchased Chatswood, that the intent was around about $400 million worth of disposals. And at this point in time, we've reported to the market as part of this results, $316 million. So it probably gives you a sense of that we still have a couple of other opportunities that we're pursuing in the marketplace. We don't have a formal divestment program outside of that $400 million. But when opportunities present themselves, we think we have a competitive advantage in the diversified asset portfolio that allows us to use asset disposals to fund growth opportunities.

Great. And then final question from me, just on that Page 21 on the developments. On some of the larger developments, is it something you're specifically waiting for in terms of improving of leasing or reduction in, sorry, construction costs? Or is it just a question of spreading your development CapEx now that you have Chatswood Chase and Chadstone underway?

Lou, it's potentially all of the above. So obviously 2 large projects are underway at the moment, being Chadstone and Chatswood. So between those 2 projects and some other smaller projects, we're contributing about $1 billion in construction development costs at the moment. In terms of some of the larger projects we've spoken about previously, there is a combination of in the final stages of authority approvals on 2 of those larger projects in Victoria, which we hope to get in this second half of this fiscal year. And then it is a challenging construction market at the moment. The benefit is we -- these projects are on land that we already own that typically produce very little cash. And so we will be patient to ensure that we execute these projects at the right time in the market.

The next question comes from Sholto Maconochie from Jefferies.

Good result. Sorry about that. I'm a bit under-resourced at the moment. I haven't gone through the result in a lot of detail. But just on the MPI line, was any one-offs this period instead of right-backs? Is there anything to be aware of?

Adrian here. We had a small amount of right-back, probably around $5 million or $6 million that hit the first half this year.

And nothing assumed in the second half?

No, nothing assumed.

Okay. And then just on from Lou's questions, just on the development, it looks like you have referred on the call, you sort of pushed out the timeframe based on the extra spend that for Chatswood and DA approvals. But is anything dropped in and out of it? Or is it just being pushed out a bit to coincide with funding and DAs?

Sholto, it's Peter here. Chatswood's not pushed out. So Chat -- just to correct that, where...

Yes, I meant the other projects.

Yes. There is a couple of ins and outs. So there's a couple of commercial projects that we had in the prior disclosure that have been -- that we haven't -- that we pushed out of the disclosure in terms of the appendix of the results. One was at Chadstone, which we call Dandenong Road, and one was at Balmoral. And there's a few unders and overs through the development pipeline that we've updated. Some of it's related to not only pushing out of the projects, but some increasing construction costs as a result of the current market that we're in, Sholto.

Yes, and just on that, the mixed-use stuff, obviously you're focusing on the flagship assets, which are pretty good retail assets. The mixed-use sort of the stuff, the returns aren't as good. Is that why you sort of focus? And then DAs taking longer. What's sort of going on with the mixed-use strategy?

No, good question. Look, from our point of view, yes, the DAs do take longer, both through local and state governments, but there is clearly a push around a housing policy at the moment, so we're looking at the mixed-use projects to see if we pivot them more towards residential than commercial in terms of those mixed-use projects as we get through the final stages of the DA authority approvals. And when we do risk adjust the projects, at this particular point in time in the market, the retail projects are the higher value delivering projects at this point in time in the cycle. And that's why they're prioritized.

That's great. And a good result.

The next question comes from David Pobucky from Macquarie Group.

Congratulations on the result. Just a question around guidance and what's embedded in it. I think you just mentioned you expect similar comp NPI growth to last year, and I think previously you had negative 1% real leasing spreads assumed for the full year. Just wanted to ask, what that expectation is now, please?

It's Peter here. So in the guidance, we still have within the guidance for the back half of this year, I assume negative leasing spread. It's obviously not where our internal targets are for our team, and if the leasing spread ended up around about flat for the end of the year, then there's probably circa an extra $1.5 million that would flow into the results. So at this stage where we're halfway through February, our cadence in terms of leasing deals is remaining, and our spreads are still positive. So if it gives you any sort of flexibility around your modelling, that's where we're at. So negative spread for the second half is in the guidance, and there's a small upside. The key to it, though, is if we continue this momentum, the upside will flow through to a whole annualized view for FY '25.

And just another one on modelling question. What's your assumed impact from downtime in developments, please? If you can just touch on first half, second half, and maybe '25 and '26 if you've got some expectations that you can share, please.

Yes. Sure, David. First half, we're about $10 million loss of rent. Second half, really because of Chatswood kicking off, we're closer to $20 million. So $30 million for the full financial year '24. FY '25, Chadstone rolls off, and then Chatswood really kicks in in a material way. So we expect loss of rent probably to edge up to about $35 million in FY '25. And then '26, as Chatswood rolls off, then loss of rent should come down. But '26 is a bit harder at the moment because so much can change in that pipeline over the next couple of years. So it potentially will come down after FY '25.

And just last one on Chatswood Chase, just in terms of the longer-term strategy there in terms of your 100% interest, are you comfortable with that, assuming you are? Just any color you can provide there, please?

We're comfortable with 100% interest and taking that development through to fruition. We also have another 2 development blocks that are adjacent to Chatswood, which we're working through as well. So at this stage, we're absolutely comfortable with 100%.

[Operator Instructions] The next question comes from Grant McCasker from UBS.

Just to follow on from some of those development questions. You have been sort of running a process to introduce capital into some development projects. Are you able to provide an update on those?

Yes, Grant, it's Peter here. What we're trying to do, and it was probably part of the answer from the prior question, but I'll extend. The 3 larger projects, Buranda, Box Hill, and Victoria Gardens, we were running a process that's got to a natural point in time. What we are looking at in terms of those projects is 2 of those projects have a formal authority approval that was a call in by the Victorian Minister that it's gone through an advisory panel process which has been concluded. We're waiting for the outcome of that process. It's difficult to raise capital unless we've got the confidence that the authority approval is in line with our anticipation of the products we're trying to deliver to the market. So that's point one. And the second point on it is, particularly in the cycle at the moment, it's likely that we'll pivot some of the commercial mix on some of -- on those 3 larger projects to be repivoted towards residential. So it's a little bit more work that we need to do in terms of the exact product that we're taking to market plus the authority approvals to have confidence in terms of raising that capital. So it's probably, I would not say that we'll be in the capital raising stage in this fiscal year.

The next question comes from Ben Brayshaw from Barrenjoey.

I just had a follow-up question on your discussions potentially with third-party capital. I appreciate you're still working through some processes. But where do you see required rates of return for institutional capital potentially looking to come into your portfolio at some point in the future to deliver your project? Have you got, I guess, a range that you could talk to at this point in terms of how you're seeing the market?

Yes. Ben, it's Peter. Typically, on an unlevered IRR point of view, we don't think institutional capital is coming in any less than 8% and typically will require 10% in terms of a return. That's from the initial work that we've done in terms of the mixed-use scenarios. Probably for retail, it's still above. In terms of significant capital coming in, it's probably closer towards the 10% unlevered IRR. We're still having some active discussions and it's interesting in the market at the moment, the level of capital, particularly around retail projects that are still coming in for discussions. And so we're quite buoyed by that. And it's essentially across the spectrum. So previously it was on the smaller assets and now we're seeing that go up the size curve in terms of capital interest on retail assets.

Terrific. Peter, just a follow-up question as well on holdovers, excluding those tenants holding over for future development of the circa 230 within the core portfolio. How should we be thinking about the trajectory of holdovers going forward potentially into a softening retail environment?

Good question, Ben. There's a page that I'll refer to you to later in terms of the holdover profile. But we did a lot of work coming out of the pandemic period. So moving into the pandemic period, there was quite a lot of short-term leases. Coming out of the pandemic period, we did a lot of work, particularly with the national retailers who had -- we had significant holdover liability for poor choice of words too. And we've renewed them towards the end of FY '23 for longer term leases. We still -- and so, I would anticipate that our leasing transactions will actually be down on last year because we did so much work from last year that allows us to kick out that holdover profile. So we're fairly comfortable over the next couple of years or so. I think if you want to refer to the page, it's Page 24 in the presentation.

[ Sorry ], if I could just clarify, are you expecting positive rent spreads when those leases are reset to a proper tenure?

That's what we're -- so essentially the holdovers that we renewed towards the end of FY '23 and rolling into this year have resulted in positive leasing spreads. How future holdovers will occur, we would really have to assess within 12 months of those holdovers coming to fruition in terms of the state of the sales environment in the market at that time.

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

I have a question around the specialty sales for the December quarter. What was that number if you, it was around 0.4% if I'm reading Slide 8 correctly. CBDs and outlet centers look like they grew over the half, 3% to 5%. If you strip those out, what do you get for that specialty quarter number?

Good question James. We'll probably have to do the cut and dice and come back to you on that one. Fundamentally, the CBDs obviously they were a star performer in terms of the first half. And also, what was important for us as SMEs was also pretty resilient. And bearing in mind a lot of the SMEs are in the CBDs or in the retail services or food and beverage sector, which are also the performing categories. So in terms of your specific question, what we'll do is we'll come back to you just outside of this call, we'll exclude outlets and CBDs and come back to you with a number. It'll be obviously a slightly negative number excluding those.

Yes, maybe over the half as well because if you -- it's probably negative over the half I imagine given CBDs are up 5.6% retail and outlets are up 3.5% and the half numbers [indiscernible].

James, yes, what I will say though, there's always a lag between sales and our performance and I think we've tried to highlight in the presentation packs as well. If you look at some of the underperforming categories, they're coming off a very high base. So say Apparel & Footwear and Jewellery were categories that towards the end of the quarter were at or below their prior year comparison, but they're also the highest leasing spreads. So it's because of very strong growth over the couple of years and setting themselves for success and signing up on longer leases. That's what gives us the confidence it's a moment in time component.

Okay. That's clear. And then and maybe, I mean, you should probably have January sales in [ 1 hour ] I imagine. Can you give a feel for where that is?

Right now, we probably do expect, look, we haven't rolled up January sales at this particular point in time from discussions with retailers and having a look at the few that have provided results, we do expect that sales will be pretty benign in terms of growth for January and February. And hence the reason why we've provided a cautious outlook for sales for the second half of FY '24.

The next question comes from Alexander Prineas from Morningstar.

Just thinking about the long-term outlook for the tenant mix, obviously we've sort of had a few years of remixing things like sort of upweighting food and beverage and services, that type of thing. Do you think that's sort of fairly steady to the extent you can predict it over the long-term? Are there any big remixing kind of trends that you see on the horizon?

It's Peter here. Ultimately, we still think we're underweight on food and beverage and leisure and entertainment and I still think you'll see a continual upweighting in that. And then what we call categories on trend that are really around athleisure, so the key mono brands in athleisure, youth fashion and particularly for us is upscaling quite larger in luxury. They're probably the top of mind focus for us in terms of particularly our premium assets in our outlet portfolio and combine those assets, a significant weight into our total portfolio. So that's where our focus is.

Do you think that's sort of, can you quantify to any degree how far underweight or maybe how many years that sort of remixing trend is? How long you see those playing out for?

It's we do it on an asset-by-asset basis, but in terms of percentage of category contribution, we would probably in the next 5 years like to see food and beverage, leisure and entertainment upweight by about 2% to 3% in terms of our GLA category contribution. Luxury is fundamentally larger increases across our 3 key assets being Chadstone, Chatswood and Queens Plaza and the introduction of -- further introduction of luxury in our premium outlet portfolio in certain sites. The actual percentage, I'll come back to you separately, Alexander, but we'll have to figure that out based on the completed development profile of what we're building, what's under construction currently and plan to be in the next couple of years.

At this time we're showing no further questions. I'll hand the conference back to Peter Huddle for closing remarks.

Look, what I'd like to do is just thank everyone for participating on the call today. We're particularly pleased with the results coming out of the first half. As I said, we've got a cautious outlook for the second half, but fundamentally we're in good shape with a good team. And we are executing, as we've said previously, at pace and aligned to strategy. So thank you all for your time today and look forward to catching up with you independently.