Full Year 2026 Property for Industry Ltd Earnings Call
Speaker #1: Moloney, our Head of Investment Management. This morning, Craig and I will speak to the topics outlined here as usual. Craig and I will take you through the presentation, and then there will be an opportunity for participants on the call to ask any questions they may have.
Speaker #1: So if you'd turn now to page 4 of the presentation, where we lay out the highlights, the FY26. PFI's FY26 result reflects the resilience of our industrial property portfolio.
Speaker #1: We're strong leasing outcomes and high-quality cash flows, driving double-digit earnings and dividend growth. Highlights included: valuations across our 2.3 billion industrial property portfolio remain stable, despite ongoing economic and geopolitical volatility.
Speaker #1: While portfolio cash flows were supported by 7.7% growth and contract rents and occupancy of 98.7% at year-end. We achieved key green star development milestones during the year, including completion of stage 2 at 78 Springs Road, commencement of stage 1 of Potra Creek Estate and Finurpai in the second half, and the advancement of lease negotiations that would enable commencement of stage 1 at our Harris Road development.
Speaker #1: Our capital position remains robust, with over 200 million dollars of available liquidity, following the post-balance state refinancing of our bank facilities and guaranteeing remaining comfortably within our target range at 34.2% at year-end.
Speaker #1: This activity combined to deliver profit after tax of 77.7 million dollars for the year, with funds from operations, or FFO, increasing 20.7% to 12.9 cents per share, and adjusted funds from operations, or FO, increasing 14% to 10.93 cents per share.
Speaker #1: Strong earnings growth is supported by a fourth-quarter final cash dividend of 2.9 cents per share, taking FY26 cash dividends to 9.5 cents per share, representing a 10.5% increase on FY25 dividends.
Speaker #1: We're also pleased to guide to further dividend growth in FY27. With dividend guidance of 9.75 to 9.85 cents per share, representing expected growth of approximately 2.6 to 3.7% on FY26 dividends.
Speaker #1: We now turn to slide 6, headed strong stable returns. Before we get into the annual result itself, we wanted to take a moment to reflect on longer-term measures.
Speaker #1: Delivering strong stable returns has always been a core focus for PFI, and it remains central to how we manage and grow the portfolio today and into the future.
Speaker #1: Providing investors with exposure to a diversified portfolio of hardworking industrial property through shares listed on the NZX is fundamental to that approach. Across a wide range of market conditions, PFI has consistently delivered dependable outcomes for investors, reflecting the quality of the portfolio and the discipline applied to its management.
Speaker #1: Since PFI's inception in 1994 through to 30 June 2026, this focus has translated into an average annual total return of around 9.24%. That long-term track record continued in FY26, with PFI delivering a total return to investors of around 10.22% over the 12 months to 30 June 2026.
Speaker #1: In practical terms, a 10,000 dollar investment made at inception with all dividends reinvested would today be worth more than 16 times the original investment.
Speaker #1: We turn to slide 7. Delivering regular and growing income has always been fundamental to the PFI investment proposition. Our policy is to distribute 90 to 100 percent of FO on a rolling 3-year basis, with a clear objective of providing investors with a reliable income stream that grows over time to protect the real value of that income.
Speaker #1: Since 1994, PFI has paid a dividend every year and, importantly, that dividend has grown steadily over time. With dividends per share increasing at an average rate of 1.9% per annum since inception.
Speaker #1: FY26 continued that trajectory, with cash dividends of 9.5 cents per share. An increase of 0.9 cents per share, or 10.5 cents, on FY25 dividends.
Speaker #1: Looking ahead, FY27 guidance of 9.75 to 9.85 cents per share represents expected growth of approximately 2.6 to 3.7%, reinforcing our commitment to delivering growing dividends to investors.
Speaker #1: We turn to slide 8. Growth in net tangible assets, or NTA, is another key measure in terms of how we create long-term value for investors.
Speaker #1: While valuations will fluctuate with market conditions, since listing in 1994, PFI has grown NTA per share by remaining disciplined through multiple cycles. That discipline starts with a clear focus on industrial property, where we acquire, develop, and actively manage high-quality assets, driving rental growth and maintaining high occupancy.
Speaker #1: We recycle capital where appropriate, investing assets to reinvest in opportunities with superior returns, including developments where we will also capture development margin. This is supported by a prudent balance sheet, with diversified funding sources and disciplined guaranteeing adhering.
Speaker #1: Together, these elements have worked across cycles to grow NTA to $2.90 per share as at 30 June 2026, including growth of 6.4 cents per share, or 2.3% in FY26.
Speaker #1: Turning now to slide 10, we will start to take a look at the last 12 months. Our portfolio has continued to benefit from strong releasing outcomes and structured rental growth.
Speaker #1: Here we have a summary of the portfolio statistics as at 30 June. You can see that the company now owns a portfolio 124 tenants.
Speaker #1: Through structured rental growth and asset management initiatives, contracted rents grew 7.7% to 121 million dollars at the end of June 2026. Despite the addition of the speculative component of stage 2, it's our 78 Springs Road development, East Tamaki, the portfolio remained 98.7% occupied at year-end, with a weighted average lease term of 5.04 years.
Speaker #1: Turning to the next slide. During FY26, the team completed leases on approximately 85,800 square meters of area, or 11.5% of the portfolio by rent, for an average lease term of 6.9 years.
Speaker #1: Of the 11.5 million dollars relating to stabilized contract rents, the rents were agreed on 8 million dollars of this, with those rents settling 22.1% above previous contract rents.
Speaker #1: The remaining 3.5 million dollars of stabilized contract rents secured during FY26 is subject to a market review on renewal, after factoring in review caps, those 4 leases have been assessed at being around 14% underrented at the end of June 2026, with a weighted average review date of October 2026.
Speaker #1: Moving over to page to slide 12. As I mentioned earlier, the portfolio finished the year 98.7% occupied, with vacancy largely reflecting the speculative component at stage 2 of our Springs Road development.
Speaker #1: Excluding development opportunities, 9.5 million dollars, or 7.8% of contract rent, is due to expire in FY26. Expiry is a weighted towards the second half, with two larger lease events accounting for almost half of FY27 expiry.
Speaker #1: The white bars in the lower chart represent the development-related opportunities, including lease expiry at Springs Road, in Nielsen Street, that are expected to facilitate future redevelopment activity.
Speaker #1: If you could turn to slide 13, we'll take a closer look at the two most significant lease expiry. The two most significant FY27 expiry represent approximately 3.9% of contract rent, with both tenants indicating they intend to vacate.
Speaker #1: At 670 to 680 Rosebank Road, the current lease expires at the end of this month, contributing approximately 1.8 million dollars of annual rent and accounting for around 70% of income at the dual tenanted site.
Speaker #1: While the current rent is modestly above market, a targeted refurbishment program is expected to support releasing at around current rental levels, while maximizing the value of the existing improvements.
Speaker #1: At 7 to 9 Nile Burgess Road, the current lease expires at the end of March 2027 and is currently around 25% underrented. Following a modest refurbishment program, management expects to release the property at improved rental rates capturing rental growth.
Speaker #1: Importantly, FY27 guidance assumes no income is generated from either property in FY27, following the expiry of the existing leases. Moving now to slide 14.
Speaker #1: 123 rent reviews were completed during FY26, resulting in an average uplift of 7.2%, or 6.9% annualized, on 92.1 million dollars of contract rent. Almost 90% of our portfolio is subject to some form of lease event during FY27.
Speaker #1: With 24.6 million dollars of contract rent, or 20.2% of the portfolio, subject to a market review in FY27. Those leases are around 10% underrented as at June 2026, after factoring in review caps.
Speaker #1: If you could turn to slide 15. During the year, we recorded an increase in the value of our portfolio from independent valuations of 16.1 million dollars, or 0.7%, to 2.3 billion dollars.
Speaker #1: The valuation outcome was primarily driven by realized rental growth across the portfolio, together with an increase in land values at Totra Creek Estate, relative to the initial acquisition price.
Speaker #1: As a result, the portfolio in valuation activity excluding our active development sites verifies past yield increase 18 basis points to 5.41%, while the portfolio market cap rate confirmed slightly to 5.73%.
Speaker #1: In independent market rental assessment of the entire portfolio is completed as part of the valuation process. This assessment estimates that PFI's portfolio is around 7.1% underrented.
Speaker #1: Turning to slide 16. PFI's portfolio continues to deliver rental growth by structured rental growth, rent reviews, sorry, and capturing releasing spreads. The portfolio was 11.2% underrented as at 30 June 2025.
Speaker #1: Market rents continue to grow over the year by 1.6% on a like-for-like basis. However, PFI achieved a 6.5% growth in those same rents, as a result, PFI's portfolio underrenting gap closed by 4.4% to 7.1% as at 30 June 2025.
Speaker #1: And this underrenting gap continues to provide a tailwind to earnings. I'm now going to hand over to Craig, who will speak to several topics, including a review of annual results.
Speaker #1: Craig.
Speaker #2: Well, thanks, Simon, and good morning, everyone. We appreciate you taking the time to tune in this morning as we share with you PFI's FY26 annual results.
Speaker #2: At a headline level, profit after tax of 77 million dollars was down 28 million dollars on the prior year, driven by fair value gains on properties in FY26 of 16 million dollars as compared to gains of 71 million dollars in FY25.
Speaker #2: However, FFO was up 20.7% on the prior year to 12.9 cents per share and AFFO was up 14% to 10.93 cents per share, with both measures void by 15.2 million dollar increase in net rental income.
Speaker #2: As a result, cash dividends for the year of 9.5 cents per share have been declared representing an increase of 10.5% on FY25 dividends. So let's dig into those numbers a bit.
Speaker #2: Please turn to slide 18. On this slide, we take a look at net rental income, which at 123.2 million dollars is up 15.2 million or 14.1% on the prior year.
Speaker #2: A key contributor to the a key contributor during the year was additional income of 3.6 million dollars from the early lease surrender at 92 to 98 Harris Road.
Speaker #2: The other main drivers were positive leasing activity across the portfolio, contributing an increase of 9.4 million dollars. And the completion in the current and prior years of five Green Star rated development projects at Boutman, Springs Road, contributing a further 1.6 million dollars of additional rental income.
Speaker #2: Moving now to slide 19. On this slide, we can see how the activity over the financial year has translated into adjusted funds from operations, or AFO, on the positive side.
Speaker #2: AFO level net rental income was up 14.1 million dollars, or 2.79 cents per share on the prior year, driven in part by that AFO mentioned early lease surrender.
Speaker #2: The largest offsetting factors were an additional 4.7 million or 0.93 cents per share of maintenance capex, equivalent to around 36 basis points. As well as a 0.30 cents per share increase in tax driven by higher taxable earnings.
Speaker #2: After normalizing FY26 AFFO for the early lease surrender payment at Harris Road, underlying AFFO earnings were up 0.85 cents per share, or 8.8%, on the prior year.
Speaker #2: If you could turn now to slide 20. And we turn our attention to dividends. The PFI board is today resolved to pay a fourth quarter final cash dividend of 2.9 cents per share, with the dividend reinvestment scheme not operating for this dividend.
Speaker #2: This fourth quarter dividend will take cash dividends for the FY26 financial year to 9.5 cents per share, a 10.5% increase on FY25 dividends. After normalizing FY26 earnings for the early lease surrender payment at Harris Road, dividends of 9.5 cents per share represent a payout ratio of around 90% based on PFI's dividend policy range and approximately 91% of AFFO on a one-year basis.
Speaker #2: Looking ahead, the PFI board has provided FY27 dividend guidance of 9.75 to 9.85 cents per share, represented expected growth of approximately 2.6% to 3.7% on FY26 dividends.
Speaker #2: FY27 has commenced in line with the expectations. Supported by high cash collection rates, resilient portfolio performance, embedded rental growth, and strong portfolio fundamentals. Based on current forecasts, FY27 guidance is expected to result in a one-year AFFO payout ratio of approximately 95% before normalization, or 92% after normalization.
Speaker #2: While remaining towards the lower end of PFI's dividend policy range, after normalizing FY26 and 27 earnings. For that lease surrender payment. Guidance assumes AFFO adjustments of 9 to 10 million dollars, and the continuation of investment boost through FY27.
Speaker #2: And as always, remain subject to events beyond PFI's control. Turning now to slide 21. And looking at the balance sheet, here we provide more detail on the change in value of PFI's investment properties now valued at 2.3 billion dollars.
Speaker #2: During the period, we completed acquisitions in Hamilton and on Mount Wellington Highway in Auckland, as well as settling the Land purchase at Spitting Road.
Speaker #2: We also deployed 55 million dollars on capital expenditure, with the majority of this being spent completing the company's Green Star development project at stage two of Springs Road as well as early works at the Totra Creek Estate, which was formerly called Spitting Road.
Speaker #2: In addition, as Simon mentioned earlier, valuation gains resulted in a right up of 16.1 million dollars, and these increases were partially offset by divestments in Christchurch and New Plymouth, which settled in March of this year.
Speaker #2: So turning now to slide 22, where we look at NTA, or net tangible assets. NTA increased by 6.4 cents per share, or 2.3%, with the increase being the result of that positive valuation outcome retained earnings and a small gain in the fair value of our swaps.
Speaker #2: So moving now to slide 24 for an update on capital management. First, thinking about funding, the second half of FY26 was an active period for us.
Speaker #2: We issued 200 million dollars of 6 and a half year senior secured fixed rate bonds in April. The proceeds from that issue replaced the 100 million dollars of bonds which matured in the first half of FY26.
Speaker #2: So on a net basis, we added 100 million dollars from debt capital markets to our overall funding envelope during the period. And looking just beyond balance date, last month we refinanced our bank facilities, introducing adjustable green tranche limits in the new facilities so that as the value of our Green Star certified properties grows, we can draw more green finance against it at a favorable term.
Speaker #2: More broadly, PFI's funding mix of liquidity, diversity, and capacity puts the company in great shape to execute on its strategy. Moving over the page to slide 25.
Speaker #2: On this slide, the top chart shows our bank and non-bank facilities as they stand after the April bond issue and July bank facility refinance.
Speaker #2: The effect of our recent capital management decisions is clear. We've extended the maturity profile of our debt, and at the same time, diversified the makeup of this funding.
Speaker #2: The lower graph illustrates our hedging profile. Through interest rate hedging, an average of around 65% of the company's debt is fixed at a average rate of around 3.15% during FY27, meaning a good portion of our interest costs is protected against interest rate movements.
Speaker #2: Turning now to slide 26. Here we provide a bit more detail on committed gearing. Following all currently committed acquisitions, divestments, and projects, and excluding any future revaluation impacts, development margins, or general portfolio capex, we currently see gearing lifting to around 36.3%, remaining well within PFI's target range.
Speaker #2: PFI's sufficient capital available within our existing funding envelope for the company's near-term development pipeline with an ability to maintain gearing near the midpoint of the target range covered in more detail and appendix five of this slide deck.
Speaker #2: Moving now to slide 28. And speaking briefly about sustainability, this slide summarizes our progress against our sustainability targets. We've continued to make great progress on our Green Star solar and LED lighting targets during the year, in particular, we're pleased to have achieved a five Green Star design rating for our new building at stage two of 78 Springs Road, partly leased to Mitek.
Speaker #2: We also certified some of our existing portfolio under the Green Star performance tool, meaning that together with recently completed developments, around 20% of our portfolio is now rated Green Star.
Speaker #2: So that's all from me for now. I'll hand you back to Simon, and I'll be around for questions at the end. Simon.
Speaker #1: Thanks, Craig. We're back on slide 30 now. So turning to current market conditions, CBRE expects Auckland industrial vacancy to increase throughout 2026, reflecting the well-signaled completion of a significant volume of speculative development that is currently under construction here in Auckland.
Speaker #1: Importantly, while vacancy is expected to continue increasing from historic lows, it is forecast to remain within long-term averages and below levels typically associated with a materially weaker leasing market.
Speaker #1: Looking ahead, a gradual recovery in New Zealand's economy is expected to support improving industrial demand and net absorption from 2027. With forecast absorption expected to outpace new supply over the medium term.
Speaker #1: Consistent with these conditions, CBRE expects industrial face rents to remain stable throughout 2026. Although high vacancy is expected to result in increased incentives and some softening in net effective rents during the current calendar year.
Speaker #1: From a PFI perspective, however, the recent rent reviews and leasing transactions continue to settle above market rental estimates. With limited incentives required outside newly completed or vacant space.
Speaker #1: This is supported by the quality of our portfolio and tenant base, as well as our proven leasing capabilities. With lease renewals historically accounting for around 75% of our annual leasing activity.
Speaker #1: Turn to slide 32. On the slides that follow, we've set out our priorities for the year ahead as many of you on the call will already know.
Speaker #1: When we look at our portfolio, we split it into four categories. And these are listed on this slide. Turning to page 33. On this slide, we've provided a little bit more detail on the four categories.
Speaker #1: Our core generic holdings remain the backbone of the portfolio, providing resilient income from well-located, highly liquid industrial assets with a broad tenant appeal. Development opportunities provide a pathway to deploy capital into higher-returning, modern industrial facilities.
Speaker #1: While also supporting the ongoing improvement in the quality and sustainability of the portfolio. Specialized assets offer stable income streams, typically underpinned by more bespoke tenant requirements.
Speaker #1: Longer lease terms and higher replacement costs. And finally, non-core holdings are assets that sit outside our long-term focus, with asset recycling remaining an important part of our capital management strategy.
Speaker #1: Taken together, these categories provide a clear framework for capital allocation, supporting portfolio quality earnings growth, and long-term value creation. Turning now to slide 34.
Speaker #1: On the horizon, we have several near-term development opportunities. FY26 saw practical completion of stage two at 78 Springs Road and the commencement of our construction at Tokto Creek Estate, while we continue to progress development opportunities at 92 to 98 Harris Road and across our remaining brownfield sites.
Speaker #1: In the next few slides, provide a closer look at four of these opportunities. We have a number of other development opportunities within the portfolio, with more detail on these provided in appendix four.
Speaker #1: But today, I'm going to focus on the near-term. So moving through to slide 35. Here we provide a closer look at stage two of 78 Springs Road, which was completed in April 2026.
Speaker #1: Stage two has delivered approximately 16,000 square meters of five Green Star rated industrial space, with around 70 sorry, 60% leased to Mitek on a 12-year term.
Speaker #1: Leasing inquiry for the remaining speculative component has been encouraging, and based on current lease up assumptions, stage two is expected to deliver a yield on cost in excess of 6.5%, including land.
Speaker #1: Looking ahead, demolition and asbestos removal of the final existing warehouse is expected to be completed in H1 FY28, enabling future stage three development works, which are expected to be tenant lead.
Speaker #1: Turning now to slide 36. This slide provides an update on stage one of Tokto Creek Estate and Panupai, formerly referred to as Spitting Road, where construction commenced in March 2026.
Speaker #1: The project is progressing in line with program and budget, with completion targeted for Q4 FY27. On completion, it will deliver approximately 8,500 square meters of five Green Star rated industrial space, and is targeting a yield on cost of around 6.5%, including land.
Speaker #1: Importantly, the fixable design allows us to accommodate a range of tenancy requirements, positioning the project well to respond to market demand during the planned lease up period.
Speaker #1: Future stages at Tokto Creek provide the opportunity to progressively develop a further four hectares of land over the next three to four years, supporting total investment of around 140 million dollars across the estate.
Speaker #1: Moving to slide 37. This slide outlines the proposed first stage of the redevelopment of 92 to 98 Harris Road. Following Grain Corp's early lease surrender, the site has been cleared and positioned for redevelopment with advanced negotiations now underway with the leading international occupier regarding stage one.
Speaker #1: If progressed, stage one will comprise approximately 5,600 square meters of warehouse, and 1,300 square meters of office accommodation, requiring around 25 million dollars of incremental capital expenditure and targeting a yield on cost of approximately 6.5%, including land.
Speaker #1: Importantly, the current master plan provides flexibility for a further tenant lead stage, allowing the site to respond to future occupier demand and maximize value over time.
Speaker #1: Moving now to slide 38. Where we outline the redevelopment opportunity at 304, 316, and 318 Nielsen Street, and Penrose. The site benefits from PFI's successful aggregation of a number of contiguous properties and provides the opportunity to deliver a significant new industrial facility in one of Auckland's premier industrial precincts.
Speaker #1: Given current market conditions, the development will be tenant lead, while current master planning indicates the site could accommodate approximately 14,000 square meters of five Green Star rated industrial space.
Speaker #1: We retain significant flexibility to tailor the scale and the configuration of the project to occupier requirements prior to commencing redevelopment. Moving through to slide 39.
Speaker #1: Including the project's just discussed, we currently have 11 planned projects across Auckland's key industrial precincts, representing around 335 million dollars of capital investment, excluding the value of the land already owned by PFI.
Speaker #1: These projects are expected to deliver embedded value progressively over the next six years or so, as they reach completion and leasing activity captures market rents and development margins.
Speaker #1: Lastly, since the start of 2024, we've completed over 70,000 square meters of five Green Star rated industrial space, all delivered on time and on budget, a strong track record we intend to build on.
Speaker #1: Moving on to slide 41. So to summarize, FY26 was another strong year for PFI, we delivered double-digit growth in FFO, AFFO, and dividends, reflecting the quality of our portfolio, strong leasing outcomes, and the disciplined execution of our strategy.
Speaker #1: At the same time, we continued to grow the business, completing stage two at 78 Springs Road, commencing construction at Tokto Creek Estate, progressing development opportunities across the portfolio, and enhancing funding flexibility through a successful bond issue and the refinancing of our bank facilities post-balance day.
Speaker #1: With a high-quality, well-leased portfolio, embedded rental growth, and a significant development pipeline, PFI is well positioned to continue delivering sustainable earnings growth and grown returns for our shareholders.
Speaker #1: Thank you for your time. That concludes the presentation, and we're happy to take any questions you may have.
Speaker #2: Thank you. To ask a question, you will need to press star one and one on your telephone, and wait for your name to be announced to withdraw your question.
Speaker #2: Please press star one and one again. We will now go to our first question. One moment, please. And our first question today. Comes from the line of Nick Marr from McQuarrie.
Speaker #2: Please go ahead.
Speaker #3: Morning, team. Just on FY26, AFFO, when you sort of upgraded earlier in the year, you talked about how there was a bunch of maintenance that was sort of deferred to 27.
Speaker #3: Kind of looking at the numbers, maintenance was still pretty high. So does that include the deferral? Did something else sneak in there? And then 27, the 9 to 10 million dollars of FO adjustment still sounds like there's some pretty high maintenance coming through.
Speaker #3: Is that partly the refurbishments on those two vacant properties? And or is there something else in there as well?
Speaker #4: Yeah, hey, Nick. Craig speaking. I think the yeah, the short answer is that yes, that deferral is reflected in the high number for 27.
Speaker #4: But I think at the same time, we still actually managed to get through a fair bit of it in 26. So it's kind of a yes and yes, I guess.
Speaker #4: I would say, and absolutely, the numbers for 27 include those two refurbishment numbers. There's some other roofs that we've got going on in there.
Speaker #4: These sorts of things. So as you know, sometimes that maintenance capex can be pretty chunky in the timing of it can be a bit pretty hard to handle because it often requires a tenant to be cooperating getting onto the roof, those sorts of things like that.
Speaker #4: So certainly it's sort of elevated period and hence why we wanted to, I guess, give you a bit more color for FY27 as to what those numbers in terms of FO adjustments would look like.
Speaker #3: Yeah, no, that's helpful. And just in terms of those two expiries, seems like a reasonably long lease-up time on some of those. How much of that time is the time spent actually refurbishing it versus allowed kind of lease-up periods and are you sort of adding extra caution at the moment given the tougher leasing backdrop?
Speaker #5: So in terms of the Rosebank Road, expiry, we get that back end of August, Nick. And so we've got a three and a half month refurbishment period there, which obviously takes us very close to the Christmas period.
Speaker #5: So yeah, there's a bit of conservativeism in and around trying to lease something through that period. The Nile Burgess one, the lease expiry is not till the end of April.
Speaker #5: So for FY27, we're just assuming no income on either one of those given we're assuming there'll be some incentives involved as well.
Speaker #3: No, that's helpful. And then in terms of the portfolio valuation, the second half looked a little bit kind of soft, especially if you had some of the uplift on spitting roads, land coming through.
Speaker #3: Could you just talk through some of those movements, like the market rental growth of 1.6, would arguably support more than 1.7% uplift in valuation?
Speaker #4: Simon, do you want to talk about that or you want me to give it a go?
Speaker #5: Do you want to give it a go?
Speaker #4: Yeah. Look, I mean, I think I guess coming into the beginning of calendar 26, there was a sort of fear wind in the sales of the market and things were going along quite nicely.
Speaker #4: And obviously, the sort of Middle East conflict and everything that that entails. So that definitely has an impact, has had an impact on leasing decisions and these sorts of things like that in the market.
Speaker #4: And so from a valuation point of view, I think we saw some sort of momentum coming into the back end of 26, a little bit of that momentum, I guess, has come out, as people are a bit more cautious as we sit right now.
Speaker #4: So I think that's sort of where things are at when it comes to the sort of the valuation market. I mean, that said, we actually got some transaction summaries through just last week on some recent sales.
Speaker #4: There's a 25 million dollar sale. With an equivalent yield of 5.4%, I mean, that does have a long lease. That's 20 years. There's a 39 million dollar sale.
Speaker #4: With an equivalent yield of 5.35 on a four-year WALT, and there's a 15 million dollar sale with an equivalent yield of 5.1% on a two-year income.
Speaker #4: So I think it's fair to say that stuff is still transacting. And there's some pretty good prices there, but that last six months certainly hasn't translated into any additional uplift of any great degree.
Speaker #4: And you can see that reflected in our numbers.
Speaker #3: Okay, thank you.
Speaker #2: Thank you. Our next question today comes from the line of Rohan Corman-Smith from Forsythe Power. Please go ahead.
Speaker #6: Good morning, guys. Firstly, investment boost. Can you give us an idea of what sort of benefit to the current tax year that provided? And also maybe just trying to work out like an absolute underlying here without any of these tax benefits and the surrender payment, etc.
Speaker #6: Because obviously, you've got to things coming in and coming out that may or may not be there in future.
Speaker #4: Yeah. Sure. So investment boost, I think the kind of most significant part of that is when we completed development. So that second stage of Springs Road, that was where you saw that investment boost benefit be booked in H2 of this year.
Speaker #4: And off the top of my head, that's sort of a couple of million dollars of benefits. In terms of that there. So I guess that's kind of at the highest level, I guess, the benefit of that to us.
Speaker #4: I mean, of course, every dollar we're spending when it comes to maintenance capex and those sorts of things, you're also sort of getting that there.
Speaker #4: Yeah, when it comes to the normalization side of things, I think we've talked about those in the various bits of paperwork that we've put out there, but I and make sure that we're clear here, in FY26, it's roughly speaking, two and a half million dollars of additional income from that surrender payment there.
Speaker #4: Of course, you're getting the whole payment, but then you're getting you were going to be getting income anyway. And then as we unwind that in future periods, it's around 1.2, 1.3 million dollars in future periods as they unwind.
Speaker #4: So not sure if those numbers help.
Speaker #6: No, no, that's helpful. That's helpful. And Simon, you spoke to hiring centers and new builds and vacant space, given you've got a bit of new build space and vacant space coming up.
Speaker #6: Can you just give us an idea of where those incentives sit, or you think they sit?
Speaker #5: I think if you look at the market, it's pretty common now for a minimum of one month per year of proposed term. So if you're looking to try and get someone in on a 10-year lease, you're looking at 10 to 12 months of rent-free period or the equivalent of.
Speaker #5: So it's quite markedly different to an existing tenant that is renewing. Typically, we give away very little. We might work with them to secure it early.
Speaker #5: There might be one or two months, but yeah, it's really up to that one month at least is what we're seeing in the market.
Speaker #5: And on occasion, depending on the asset, maybe one and a half months. So yeah, and I think we talked well, we talked about it in the presentation.
Speaker #5: Whilst the face rents don't seem to be coming back, typically on new builds, they're sort of up around 240 to 255 a square meter.
Speaker #5: The net effective will start to track back slightly with those incentives.
Speaker #6: Okay, thanks. And just on these expiries that are vacating, I think at the half you talked to one of them, which I'm pretty sure is Rose Bank that you were certain we're leaving.
Speaker #6: You always talk to your kind of active tenant management. Was the Neil Burgess one a surprising? Can you just kind of go through what happened there?
Speaker #5: So Noel Burgess, obviously, that doesn't expire towards the end of FY27. We've been an active discussions with them. That's DHL, so large international occupier.
Speaker #5: They had a nine-month notice period. So we've been talking to them for two or three years around whether they will stay or leave. So yeah, at the half year, we've just been given no clear direction, even though that we've been working with them.
Speaker #5: And right up until the nine-month period, there was a chance that they would stay, but yeah, obviously, they've said no. And so they've given notice that they'll be leaving at the end of the lease.
Speaker #5: So that was it really. Sometimes you get a tenant who will happily commit two, three years out and suits their business with DHL. They've got a lot of space in and around Auckland.
Speaker #5: So yeah, they're just reducing their footprint around Auckland.
Speaker #6: Okay, cool, thanks. And just one last thing. There was a comment that you made and you said that vacancy below the level of vacancy associated with material weaker.
Speaker #6: Industrial market rents, where Sudbury have a tracking. When in your experience do market rents weaken materially? At what sort of level of vacancy?
Speaker #5: I think you'd have to be up around that five, six percent, which we're going back to the early 2000s. When a lot of development started back then, and you had rents that were going back a while now, sitting around that $100 a square meter for new build.
Speaker #5: And there was a period where there's a bit of an arms race that went on and people started putting them up for 85 to 90 bucks a square meter.
Speaker #5: I don't think you'll see that this time. If you look at who's developing in Auckland, they're mainly institutional and high net worth owners or property owners.
Speaker #5: So you tend to see them building taking advantage of lower construction costs, but holding on to those face rents. So yeah, I don't think there'll be a material weakening in face rents.
Speaker #6: Cool, thank you.
Speaker #4: I suppose the setting to that side, the other part of that is the economics of it. I mean, obviously, with a sort of market cap rates out there of five and a half, something like that, it doesn't take long if you're dropping those face rents to get back towards that there.
Speaker #4: So you would then be. Building stuff for less than sorry, the economics would be worse than going out and just simply buying things. So I think we're a wee way off that yet.
Speaker #6: Cool. No, thanks for the call, guys.
Speaker #1: Thank you. As a reminder, if you would like to ask a question, please press star one and one on your telephone. That is star one and one.
Speaker #1: If you would like to ask a question, you will now go to the next question. And the next question today comes from the line of Vishal Bhula from Jordan.
Speaker #1: Please go ahead.
Speaker #6: Good morning, guys. Thank you for the presentation this morning. Just a couple of quick ones. Just on your FY28 expiry, you're giving great color on 27, but are you able to give a bit more information on what you're kind of seeing in FY28 and 29 and if these expiries will come along with kind of big research cycles?
Speaker #5: Let me just jump to yeah, FY28, I guess what we're seeing in general is if you go back a couple of years, Vishal, tenants were a lot more engaged to secure renewals early, which was a good thing.
Speaker #5: And you could work with them. We've seen in this type of market, like we're still talking to our tenants two, three years out from expiry.
Speaker #5: The feedback we're getting at the moment is just give us another six to 12 months. So we haven't had the success that we had in '22, '23 where we were working two, three years out.
Speaker #5: And I guess with the vacancy coming into the market, there's definitely a little bit more choice coming out there. There's a couple of reasonable sized expiries.
Speaker #5: In 2028, none of them at the moment are causing us concern. So I guess if you're looking at expiries over sort of four or five hundred thousand, there's probably seven or eight leases we're talking to the majority of those at the moment.
Speaker #5: There's no indication that anyone's planning on leaving. But it's just a little bit early given the current market to start knocking those over. So the team out the back, get in front of people, like I said earlier, generally two years out if they've not already been tracking them.
Speaker #5: So we're pretty comfortable with 2028 at the moment. The main focus is, as we said, Rose Bank Road, which finishes this month. We've got three, three and a half months of refurbishment.
Speaker #5: We've got a tenant there that we're working with. I guess is what you'd say. It's by no means a done deal. And then the Noel Burgess one that comes on next year, we're out in the market looking for tenants for what's a really good building in a great location.
Speaker #5: So yeah.
Speaker #6: No, thanks.
Speaker #4: I have a bit of color there. Sorry, Vishal, the other piece of color there is just in terms of the leases that are expiring.
Speaker #4: Looking at the more significant ones, they are very H2 weighted. For FY28, just looking down the list here, if anything over $400,000, there's only three in the first half of the year that are expiring FY28.
Speaker #4: The rest of them are all in the back end of '28. And in fact, a couple of the much bigger ones are right in June of '28.
Speaker #4: So yeah, I guess a fair amount of time to get into all of that.
Speaker #6: No clue. I appreciate that. Thanks. And I guess just on your underwriting catch-up, that was quite strong. And then looking at your 27 reviews that you're going out, you'll be beating market rental growth across most of your portfolio once again given your CPI stuff, only 10% or so.
Speaker #6: But over the next two to three years, do you kind of see a material portion of your portfolio sort of moving to the over-rented territory?
Speaker #5: Do you want me to answer that, Craig, or do you want to?
Speaker #4: Yeah. No, no, you give that a go.
Speaker #5: I think what you see, Vishal, is it will start to balance. Go back two, three years, we were 20% under-rented. So we've done a good job on the leasing front of capturing that.
Speaker #5: CBRE are still anticipated some market growth in rents. That will start to pick up to that sort of 3% plus. From 2028. So we would expect it to sort of equalize out.
Speaker #5: The main leases that we've done in the last couple of years, even in our development, have been at or around a market rent. So I think you'll see a balance start to play out over the next two to three years.
Speaker #5: We don't think we'll be materially under or over-rented is what I would say.
Speaker #6: No, that's great. And then just the last one from me. I think could you just give a bit more kind of update on what you're seeing out at Totaro Creek or Spitting?
Speaker #6: I appreciate most of it, guys, developing out there on occupies, but is anyone else looking to do anything spec at the moment?
Speaker #5: No one else is speccing out there. I don't know the last time you've been out there. There's one, two, three completed or near completed developments.
Speaker #5: And there's two currently coming out of the ground, including ours. It's probably quieter than we thought it was going to be from 12 months on.
Speaker #5: I think we said last time around we were hoping we would have secured a tenant prior to commencement. But again, the building that we've developing, it's 8,000 square meters.
Speaker #5: It's purposely been designed so that we can break it up into at least four units or up to four units, sorry. So that type of tenant, you sort of targeting that sort of 1,500 square meter to two and a half thousand square meter tenants.
Speaker #5: So they do have the ability to move a bit quicker than a large six, seven, eight thousand square meter tenant. So being out there last week on site, it's starting to take shape.
Speaker #5: It's got roof on part of it. We're expecting towards the end of this year that that tenant inquiry will start to pick up. In general, I guess you could say the tenant inquiry has been a bit quiet.
Speaker #5: The last three months, I think Craig touched on it earlier. We actually saw a bit of activity sort of November, December last year through to February.
Speaker #5: This year, it started to feel like things were starting to pull away, which was pleasing and then obviously with the Iran situation or the oil situation, sorry.
Speaker #5: It really went flat for a period. I would say the last six to four to six weeks, it does feel like there's a lot of activity starting to pick up.
Speaker #5: So hopefully this election coming up doesn't stymie that. And we'll start to see a bit of a gradual growth out. I mean, outside of Auckland, getting around the country, it's pretty buoyant in some of those regions.
Speaker #5: Clearly, the South Islands on a tear, which is great. And that seems to be filtering through. Hawke's Bay seems to be going a little bit better.
Speaker #5: So it's not all doom and gloom out there. It feels as though, particularly in the last sort of four weeks, there's a little bit more activity out there, which is pleasing.
Speaker #5: People are getting on and doing things.
Speaker #4: I suppose the other bit of color, Vishal, on a Vishal, I was just going to say the other bit of color around Totaro Creek is obviously one of the sort of parts of the thesis to get on with that was construction pricing and taking advantage of sort of attractive construction pricing.
Speaker #4: And we have locked that pricing away now through the sort of process. And that is we went in on the basis of it being attractive, and it was even more attractive than we thought.
Speaker #4: When we went into it. So there's plenty of flex in the feasibility shall we say, to still be hitting those numbers that we've put out there.
Speaker #4: And so I think the thesis still really holds true that get on and build a building while there's a bit of softness in that construction pricing and just be patient around the tenant side of things.
Speaker #6: No, perfect. Thanks, guys. I appreciate that.
Speaker #2: Thank you. We have one for oh, thank you, sir. We have one further question. And the question comes from the line of Rohan Coleman-Smith from Falls so far.
Speaker #2: Please go ahead.
Speaker #7: Hey, guys. Sorry, I just wanted to ask about slide 47. You've got a if you go back to that, you're talking about keeping gearing within the middle of the year.
Speaker #7: Target band over a forecast period, but it looks like a lot of the heavy lifting is done by fair value gains and losses. Even in the year ahead, from just on the portfolio as a whole.
Speaker #7: Can you just talk us through, I guess, the assumption that you have behind that and the confidence that you have in that, or is it just kind of running forward the CBRE forecast or something along those lines?
Speaker #4: Yeah, thanks, Rohan. I mean, this is a slide that's, I guess, responding to another slide that we've been putting in the deck for a while now.
Speaker #4: So if you look at slide 39, we've been trying to give some really clear visibility to sort of how the development pipeline would play out.
Speaker #4: And a number of folks, including yourself, have been pretty keen to understand how we might pay for that and have suggested some weird and wonderful ways that we might do that.
Speaker #4: And so I guess what we wanted to do was just put something out there that responded to that and said, if you take those two slides and look at them together, it really doesn't take much to get to the point where you assume that you could build out that pipeline and still stay within your sort of target gearing range based on a sort of level of assumptions there.
Speaker #4: So I mean, absolutely, this is assumption on assumption. This one, modest valuation growth of a couple of percent, development margins through the projects and a sort of small level of divestments.
Speaker #4: Let's be honest, every number on this slide will be wrong. But it's just trying to give people a sort of sense of this is a sort of very steady program of work ahead of us.
Speaker #4: It's very much within our control to be able to fund these things. And we think that we can kind of keep that gearing around that midpoint of our range through the sort of various things there.
Speaker #4: But look, take your point. We didn't get 2% of valuation growth this year. So that's obviously going to be highly conditional on sort of how the market plays over the next little while.
Speaker #4: But I guess just wanted to give some sense of how it might all hang together. So does that make sense?
Speaker #7: Yeah, it makes sense. And I'd say my suggestions weren't weird and wonderful, but anyway. Thanks for the extra comment.
Speaker #4: They were perhaps less preferred.
Speaker #2: Thank you. We have our currently no further questions. I will hand the call back to Simon for any closer remarks.
Speaker #1: Thanks, everyone, for listening in this morning. I know we're catching up with some of you this afternoon and a lot of you tomorrow. So I appreciate your time this morning, and we look forward to answering any questions you may have.
