Good day, thank you for standing by. Welcome to Centuria Industrial REIT Half Year 2023 Results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask questions during the session, you'll need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to turn the call over to your first speaker today, Mr. Jesse Curtis, CIP Fund Manager. Thank you. Please go ahead. Thank you.
Good morning, thank you for dialing into Centuria Industrial REIT's half-year financial year 2023 results. I'm Jesse Curtis, CIP's Fund Manager. Joining me presenting today is CIP's Assistant Fund Manager, Michael Ching. Additionally, Centuria Head of Funds Management, Ross Lees, and Group Head of Investor Relations, Tim Mitchell, are also present. I would like to commence today's presentation with an acknowledgement of country. I am joining you from the lands of the Gadigal people of the Eora Nation. Centuria manages property throughout Australia and New Zealand and pays its respects to the traditional owners of the land in each country, to their unique culture, and to their elders, past, present, and emerging. It's been a successful half for CIP, having executed significant leasing transactions and delivered value add projects which captured strong industrial real estate tailwinds.
Tenant demand continues to outpace supply of industrial space, driving vacancy to record lows and accelerating rental growth nationally. Subsequently, the REIT benefited from strong double-digit rental growth on prior passing rents. CIP's balance sheet was further strengthened during the half, led by strategic transactions that reduced gearing to the bottom end of our target range. As a result of CIP's strong performance, we reaffirm financial year 2023 FFO guidance of AUD 0.17 per unit and distribution guidance of AUD 0.16 per unit. Inflation and the interest rate environment has continued to create uncertainty. In reaffirming CIP's guidance, we have considered the interest rate movements to date, together with forecast interest rate movements, alongside the operational performance of the REIT. We will continue to monitor economic conditions as they pertain to CIP's guidance.
Earlier today, we published various documents on the ASX, including this results presentation, which we will step you through now. This presentation provides an overview of CIP's portfolio activities for the first half of financial year 2023, and an outlook for the second half. The opportunity for some questions will be provided at the conclusion of the presentation. Let's begin on slide 4. CIP is an externally managed REIT that forms part of the Centuria Capital Group family, a real estate fund manager operating under the ASX ticker code CNI. Centuria is a strong supporter of CIP and provides significant benefits from the group's long and successful track record in property funds management. Slide 5 outlines CIP's unchanged strategy to deliver reliable income and capital growth from a high-quality portfolio of industrial assets across Australia. Our consistent vision is to remain as Australia's leading domestic pure play industrial REIT.
Slide six details CIP's key metrics. The portfolio, as at 31 December, was valued at AUD 3.9 billion, with 88 high-quality industrial assets, high occupancy of 99%, and a WALE of 8.1 years. Gearing is also now reduced to 31.6%. Turning to slide seven, which outlines CIP's half year 2023 summary and strategy execution. The strong industrial market continued to provide CIP the opportunity to extract rental growth from leasing and value-add projects, with re-leasing spreads further accelerating across the half to 19%. The portfolio continued to be well-positioned with 83% of CIP's industrial assets located within urban infill markets, where demand for industrial space remains the highest.
To that end, 30% of the portfolio expires or developments are delivered by financial year 2025. Twenty percent of the portfolio is linked to CPI reviews, providing strong top-line rental income growth. Market rental growth and leasing success also provided buoyancy to valuations, substantially offsetting capitalization rate expansion. Proactive capital management through strategic transactions fortified the balance sheet. Divestment proceeds were generated from direct market divestments and the formation of a new investment partnership. Gearing is lower end, about 30%-40% target gearing range, while maintaining a diverse and staggered debt. The addition of interest rate hedging also increased the proportion of CIP's fixed debt. As mentioned earlier, CIP reaffirms financial year 2023 FFO guidance and distribution guidance, with distributions expected to be paid in equal quarterly installments. This translates to a distribution yield of 4.8%.
Whilst economic conditions remain uncertain, we will continue to monitor guidance for the balance of the year. That said, the industrial market nationally remains strong, and we anticipate CIP will deliver like-for-like net property income growth over financial year 2023. I will now hand you over to Assistant Fund Manager, Michael Ching, to take you through the portfolio overview and financial results.
Thanks, Jesse. Slide nine shows a snapshot of CIP's portfolio composition and as Australia's largest listed pure-play industrial REIT. CIP continues to provide investors with exposure to a 100% industrial-only portfolio of assets, with 98% of assets under freehold ownership. The portfolio remains geographically diverse with a favorable 90% East Coast weighting. CIP's portfolio comprises two strategically constructed sub-portfolios, both providing unique characteristics to deliver returns to unitholders, which I will detail in the next two slides. Turning to slide 10. The first sub-portfolio is our active portfolio. This portfolio provides us the opportunity to utilize our active asset management capabilities through leasing, value-add strategies, and development, with the aim of improving total returns in the short to medium term. The active portfolio's average WALE is currently 4.4 years, with approximately 30% of leases expiring by 2025.
This provides opportunities to mark the market rents on these assets, capitalizing on the significant rent growth that we are seeing in CIP's portfolio and across Australia's industrial market. The active portfolio represents 80% of CIP's total portfolio, with a weighted average capitalization rate of 4.8%. Importantly, its investment value is substantially underpinned by land value, and with an average site cover of 43%, provides the opportunity for value add repositioning, brownfield development, higher and better use development. Moving to slide 11. Our long WALE portfolio accounts for 20% of CIP's total portfolio and consists of two substantial assets with the lease expiry of greater than 15 years. With a WALE of 27 years and leads to iconic blue chip customers, these assets provide long term, secure, reliable income streams.
Importantly, 60% of the CPI linked, which provides a natural hedge in a high inflationary environment. As a reference, the Telstra Data Centre lease provided a 6.1% rent review in FY 2022. Both our long WALE assets are leased under triple net lease structures, meaning the tenants are fully accountable for operating and capital expenditure of the assets. This eliminates any cash flow leakage from these assets. The income security from this long WALE portfolio can be quite unbalanced to support distribution while providing CIP with the opportunity to execute our active portfolio strategy. Moving to the half year 2023 financial results on slide 13. CIP delivered funds from operations of AUD 54.1 million or AUD 0.085 per unit for the first half of FY 2023.
Gross property income increased by AUD 14.8 million to AUD 110.5 million, reflecting the growth in the portfolio and strong leasing outcomes over the prior year. The AUD 1.6 million of other income recorded in the half primarily relates to the coupon income received on our Southside Industrial Estate development in Dandenong South. As foreshadowed in our results released in August, the rapid rise in interest rates increased CIP's total interest costs by AUD 13.6 million to AUD 23 million six months to December 2022. Looking at capital management in more detail on slide 14. During the half, we undertook several initiatives to further strengthen our balance sheet. We realized AUD 215 million of liquidity through strategic transactions, which reduced gearing to 31.6% as at December.
This is at the lower end of our target range of 30%-40%. AUD 300 million on new interest rate swaps were entered into during the period, increasing CIP's hedging profile to 77% and maintaining an average hedge maturity of two years. We continue to monitor and further strengthen our balance sheet with current market uncertainty. Gearing at 31.6% and an interest cover ratio of 3.8 times provide ample headroom to our debt covenant. Only AUD 50 million of debt maturing in FY 2023 and over AUD 400 million of available liquidity, CIP's balance sheet remains robust and continues to be well supported by its financiers. I will now hand you back to Jesse to talk you through the operational performance over the half.
Thanks, Michael. As mentioned, we completed a number of strategic transactions during the half. A new strategic partnership was established with a circa 50% interest in 8 assets being divested by CIP. The vehicle, known as Centuria Prime Logistics Partnership, was initiated with an investment vehicle sponsored by Morgan Stanley Real Estate Investing. Importantly, it maintains exposure to these highly desirable assets as a 50% owner in the partnership. Additionally, CIP secured the direct market divestment of 30 Clay Place for AUD 34.5 million, generating a significant BIM to book and maximizing value. Combined, the transactions were sold on an average yield of 4.5%. Under Centuria's management, CIP has a long track record of capital management and improving portfolio quality through divestments, having completed over AUD 325 million of transactions across 14 individual assets.
These transactions and our capital recycling track record clearly demonstrate the ongoing demand for quality industrial assets, the value created under Centuria management, and the liquidity available to CIP under various structures. Let's take a closer look at portfolio leasing in WALE on slide 17. During the half, CIP continued to see market rents rise as subsequent parts we saw re-leasing spreads across the portfolio accelerate. 19% re-leasing spreads over the prior passing rents were achieved over the 88,500 square meters of leasing. Our leasing success included 40,500 square meters of leasing at our Southside Industrial Estate in Dandenong South, which brought the asset to 100% pre-committed 5 months prior to completion, and the early renewal of 22,400 square meters at 82 Rodeo Road, Gregory Hills. This asset was acquired November 2021 with a short 4-year WALE.
A new lease was agreed to extend the term and achieved a substantial uplift in rent earlier than the original 2025 leasing expiry. Looking forward, the portfolio offers near-term opportunity to have a continued rise in market rents, with 30% of income marking to market over the next three years. Slide 18 outlines our blue chip customer base. CIP's key focus is to ensure ongoing reliable income streams, and this income strength is demonstrated with 87% of CIP income derived from tenant customers who are listed, multinational or national companies. During the period, CIP continued to leverage its network, using scale to assist customers to expand their businesses by offering multiple sites throughout Australia, reducing downtime on our vacancies and increasing retention. This was most recently demonstrated at our Dandenong South development, where 42% of the lettable area was leased to existing customer relationships.
On slide 19, CIP continues to deliver on a pipeline of value-add projects to drive returns for investors. Recently completed projects include 92 Cosgrove Road in Enfield, New South Wales, where a refurbishment program resulted in a new lease with no downtime and a 47% premium to prior passing rent. Active projects include 616 Boundary Road, Richlands in Queensland, where works continue and a strong pre-lease interest site. 30 Fulton Drive in Derrimut. The asset was acquired in November 2021, planning is underway to reposition and expand the asset by 2,000 square meters to maximize value. Moving to slide 20 and our development pipeline. Development activities provide CIP the opportunity to create modern, sustainable assets that improve portfolio quality and attract high-quality income streams. Pleasingly, our Dandenong South development was successfully completed on time and fully leased ahead of completion.
We have over 57,000 square meters of development space currently under construction across two projects, one in Campbellfield, Victoria, the other Canning Vale, WA. Both developments are progressing as planned with strong leasing interest. Slide 20 explains our long-standing site consolidation strategy. During the half, CIP acquired an additional asset in Derrimut for AUD 12.35 million. The asset holds a short WALE and provides significant upside and rent. Our Derrimut sub-portfolio has grown to 11 assets across nearly 25 hectares of land and offers tenancies ranging from 3,000 to 14,000 square meters. Derrimut provides just one of several examples of CIP's portfolio where we have been able to aggregate large landholdings in core urban infill markets.
This consolidation strategy is beneficial to unitholders as it provides optionality for future development sites to scale to meet the growing demand from industrial users while maintaining income and access to rental growth. It also provides critical mass and diversity across tenancy size and type to facilitate lower downtime, leveraging CIP's networking effect. Turning to valuations on slide 22. CIP externally valued 28 investment properties, representing circa 55% of portfolio value as at 31 December 2022. The portfolio weighted average capitalization rate expanded 47 basis points to 4.66%. This resulted in a 1.9% decrease on a like-for-like basis. This reduction was primarily concentrated on CIP's long WALE sub-portfolio. Valuations across the remainder of CIP's active portfolio remained broadly flat due to strong market rental growth offsetting capitalization rate expansion.
Following the valuations, CIP's net tangible assets are AUD 4.08. Moving to sustainability on slide 23. CIP as an externally managed REIT has no staff and is solely a portfolio of assets. The REIT is managed by Centuria Capital Group and aligns itself to Centuria's sustainability framework. A number of key ESG initiatives were implemented during the half, including Centuria's sustainability report, which changed its code of conduct to all contractors setting out Centuria's minimum standards. Additionally, social initiatives produced excellent results, with 94% of Centuria's employees being proud to work at the company, and our workplace diversity increased with 45% of our workforce being female. Specifically to CIP, our responsible entity board has 50% female representation. Over to slide 24, which illustrates a few sustainability case studies specific to CIP.
During the half, CIP reached 4.5 star NABERS rating on its Gregory Hills asset following participation in the NABERS program for warehouses and cold stores. A 3.7 MW solar panel installation program is underway in partnership with key tenant customers, Woolworths Group and Arnott's Group. For CIP's current development pipeline, we are targeting a 5-star Green Star rating. Moving now to slide 26. Globally, industrial real estate continues to benefit from strong tailwinds. E-commerce and a tenant focus on securing supply chain resilience are driving strong demand. Despite having extremely low vacancy rates, Australia still provides relatively affordable industrial rental rates in comparison to established markets in America, the U.K., and Southeast Asia. With continued tenant demand and limited supply, this demonstrates a long runway of rental growth for industrial Australia to converge with other markets around the world. Looking locally on slide 27.
Industrial rents have continued across all major industrial markets as national vacancy hits another record low. Despite the evolving economic conditions, we are yet to see a material pullback in demand. Tenants still remain focused on supply chain resilience and securing safety stock with onshoring of operations ensuring a continuing trend. Proximity to the customer is also paramount, and this is driving significant demand of an infill industrial space as tenant customers look to minimize delivery times and reduce the costs associated with rising transportation. Supply of new space continues to be constrained due to labor shortages, wet weather, supply chain disruption, and limited industrial zoned land. Add to this, sub 1% vacancy and a large amount of tenant demand is not being met. In fact, over the next 3 years, at least an additional 3 million square meters of space is required to meet current forecast demand.
These market conditions continue to provide numerous opportunities for CIP to capitalize on further rental reversions within its portfolio. Concluding now on slide 28. We will continue to monitor and consider domestic and global economic conditions throughout the remainder of financial year 23. As presented today, the operating environment for industrial remains strong. As Australia's largest domestic pure play industrial REIT, CIP has delivered a strong result in the first half of FY 23, and we remain focused on executing our strategy to create value for our unit holders. Leasing success drove strong re-leasing spreads and value-add projects continue delivered to the benefit of unit holders. Strategic transactions generated divestment proceeds, which bolstered CIP's balance sheet. The capitalization rate for the portfolio widened. Due to strong leasing outcomes and growth in market rents, valuations only saw a minor decline.
As a result, CIP brings FFO guidance of AUD 0.17 per unit and distribution guidance of AUD 0.16 per unit for financial year 2023. Thank you for listening. At this point, I will open the call to any questions.
Thank you. As a reminder to ask a question, you need to press star one one on your telephone. To cancel, please press star one one again. Please stand by while we compile the queue new roster. One moment for the first question. Our first question comes from the Sholto Maconochie from Jefferies. Please proceed.
Oh, hi, Jesse, and everyone. Thanks for your time. Just a couple questions. What was the like for like? I saw it was 2.9% in one half 2022 and 3.4% in FY 2022. What was it for this half, the like for like NOI growth?
Morning, Sholto. Like for like, it was 3%. It's probably a little lower for the half than we would have expected, and that's as a result of us strategically being able to move tenant on in the portfolio that was underperforming and really recycling that tenant to provide a higher quality tenant in the portfolio. Over the course of the year, we expect that to normalize to closer to 4% on a full year base.
This is probably a bit of downtime where you move that tenant out. Okay.
Yeah.
Just on the, if you look at the Appendix D in this prezo, why did the rent-free abatement go up by about AUD 1.9 million? Why was that up so much in the half?
That was as a result of the leasing from the prior half, which would have flowed through now to the.
Okay. Any.
The portfolio. Shall I say, the portfolio has grown as well.
Yeah, large portfolio. Okay.
Yeah.
Has there been any pullback? Obviously, you had a not a lot of lease expiries to address, pretty high occupancy. Have you seen any pullback in demand or people a bit more cautious in this environment, at all, in the market for leasing?
No, look, the leasing market remains really, really strong. The last 12 months for 2022, we saw a record 5 million square meters of gross take up. That's about 2 million square meters more than the 10-year average. We're particularly seeing the strongest amount of tenant demand in the urban infill markets, that's really based around tenants wanting to be as close as humanly possible to their customer base or their distribution network to save on transportation costs. When you look at the forward supply cycle, we're already starting to see a lot of that supply that was gonna be delivered in FY 2023 or calendar year 2023 now getting pushed to 2024 as a result of a large amount of wet weather we've been seeing, continued supply chain disruptions, labor availability, and also slow servicing of industrial zoned land.
That's creating additional competition from tenants, which has obviously driven the high amount of rental. We're anticipating to continue to see this in the 12 months ahead.
Yeah. Understood. Then just on the debt, I think it was 3.3%. What are you assuming in the second half? I think your BBSW is at 3.4-ish%, maybe 3.5% average. What are you assuming for your cost of debt in the second half?
Yeah. I anticipate that our full year all-in cost of debt is gonna be in the mid-threes.
Okay. Cost of debt mid-three. Okay. I think that's everything for me. That's it. Thanks very much, for your time today.
No worries.
Thank you for the question. One moment for the next questions. Our next question comes from the line of Caleb Wheatley from Macquarie. Please proceed.
Morning, Jesse and team. Thanks for your time. Maybe just a couple of follow-ups from Sholto on the leasing front. It seems like there's a bit of commentary now from retailers and particularly around inventories, potentially looking to unwind them a bit, sort of post-COVID. Just wondering if you could provide any additional color on any of your movements, particularly around your kind of retail or e-commerce tenants, and what that might mean? Maybe some other categories as you focus on remixing the portfolio going forward?
Yeah. I think what we're seeing in our market in particular is historic underinvestment in last mile warehousing infrastructure. What we haven't seen until more recently was, customers like Amazon, for instance, who have really started to bolster their last mile delivery stations. That's where we've seen a significant amount of the leasing volume come from. About 59% of leasing volume within over the last 12 months has come from the e-commerce users, retailers or transport and logistics providers who are looking to bolster their last mile presence. That's the portion of market that we're seeing the most competition and the least amount of supply. I think it's less of a case around having more storage, but it's just where that storage is placed.
Given our portfolio's 83% last mile focused, that's been the area of market we've been focusing on.
It sounds like your discussions with retailers are still the much the longer term plan, as opposed to maybe hitting pause, given what might be a more challenging 12 - 18 months. Is that a fair conclusion based on your discussions?
Yeah. I think Amazon's a good anecdote for this. At the moment, they've got around 350,000 square meters in Australia. They've got briefs in the market today to double their footprint in Australia. As you might have seen, late last year, they only just guaranteed last mile next day delivery in Sydney and Melbourne. They're going to move towards the same day delivery model. They're also going to roll that out in Brisbane, Perth, and Adelaide. We're seeing significant investment, and they're just one example of tenants we talk to on a regular basis that are showing a significant amount of interest in growing their footprint, particularly in that last mile infill space.
Great. No, that's really helpful. Thank you. Just a second one on leasing. What do you think the mark-to-market of the portfolio is now? Obviously getting circa 20% spreads on new leases. Where do you think the market fits compared to your portfolio?
Based on the most recent external valuations, and external valuers, assessment of our portfolio, they're pricing our portfolio as being 10% under rented. You look at what we're achieving on the re-leasing spreads at closer to 19%, and I think that's a fair reflection of where we see the near term mark-to-market on our portfolio as at today.
Great. Thank you. Just the final one from me, just around the balance sheet now. We've obviously done a bit of recycling towards the back end of the last calendar year. A bit of discussion around the market potentially that some of the private operators come under some duress maybe this year off the back of some high interest expenses. How are you thinking about either, potentially further deleveraging or alternatively, is there now potentially an opportunity for the group to go out? We take advantage of any distress that were to come up in the market.
I think as you saw, we used the opportunity late last year to bring down our gearing to the low end of our target range, and we're still comfortable with that target range of 30%-40%. It does provide some ability for us to be able to do that. In the market. I'd expect you'd probably see us recycling assets to put that into something a little more accretive rather than using gearing headroom in the near term on those acquisitions.
All right. Thank you again for the color.
Thanks, Caleb.
Thank you for the questions. The next question comes from the line of Tom Boadle from UBS. Please proceed.
Morning, Jesse and Michael. Similar and related question on rent growth or under renting, but I wanted to sort of ask that around the valuations. On slide 22, you talk about an 11% increase in market rent within the valuations. I'd just be interested to understand if the valuation is reflecting market rents or they're under rented.
We only valued 28 of our assets or 55% of value. External valuers haven't had the opportunity to look at the mark-to-market on the remainder of our portfolio, which we will do in subsequent periods. I think the 11% growth, again, is reflective of where they've been able to assess the market at. The best read I can give you on where we sort of see that under renting position from a management perspective is the re-leasing spread that we're achieving at that 19% plus.
Okay. You're suggesting that the valuations are still under sort of high single digits.
I'd suggest so, yes. Based on what we're achieving on our re-lease.
When we haven't externally valued the portfolio, is it, you've taken the cap rate up but not reflected that higher market rent? Is that sort of accurate or is it sort of yet to
In some cases on those directors' valuations, we've taken some additional market rent to offset the capitalization rate expansion. Our view is that the market is moving so quickly. A lot of these valuations get completed in October or November, and we're now nearly four months past that period. With, in some markets, 30% and 40% rental growth coming through, and that sort of higher growth anticipated to come in the year ahead, I'm expecting there's going to be a mismatch between an external valuation done at a point in time and where we strike leasing deals on our upcoming expires.
Okay, thanks. That's clear. Finally, just wanted to ask about the solar you're installing in partnership, I think with Woolworths and one other tenant. Just wanted to understand who bears the capital cost of that and who gets the saving from the energy costs, or is it mixed across your different assets?
There are different structures we operate with, but specific to the Woolworths and Arnott's deals, both of those deals are, the solar is being funded by the tenant, and then the tenant will get the operational and cost savings benefit as a result of that installation. We provide the roof space and the cooperation with those tenants in order to help them achieve their sustainability goals, which also reduces the carbon footprint of our assets. When you think about industrial, we have very limited operational control over the assets. They're generally single tenanted. The tenants will often pay the electricity bills directly themselves. We feel the best way to make a meaningful sustainability impact is to go in partnership with our tenants.
Do you get any benefit sort of in terms of extra rent on the roof space, or is it just doing the right thing from a sustainability perspective?
It's a case by case, Tom.
Okay, thanks.
Thank you for the questions. One moment for the next question. Our next question comes from Richard Jones from JP Morgan. Please proceed.
Oh, hi, Jesse. Just interested whether there's any uplift in the expected yield on cost on the two sun throughs and the Canning Vale development given uplift in rents that you're seeing?
Morning, Richard. If you recall, 12 months ago, we bought the Campbellfield development. We were estimating at that point in time yield on cost of around 4.5%. We've actually seen that yield on cost accelerate to about 6% now based on where we're seeing market rents in the north of Melbourne. Then similar story with our Canning Vale development. When we purchased that land, we were estimating a 5.75% yield on cost. That's now accelerated to probably being in excess of 6.5% on that. In most of these cases, we've substantially de-risked the construction cost, so we're not subject to variability across that line.
We're really taking a lot of the leasing risk to the upside at the moment with where rents are heading on those. They could land better, but our best forecast at the moment is 6-6.5.
Okay. Good one. South Gippsland Highway as well?
That project was completed, and that was delivered on a yield on cost of 5%.
Five. Okay. Just on the early renewal at Gregory Hills, can you just talk through the rationale from the tenant's perspective as to why they did that?
Yeah. The tenant has a lot of embedded infrastructure within that tenant. They've invested heavily in fit-out racking and automation at that site. They intended to invest further in that site and came to us to discuss a lease renewal. We were open to doing that, providing we were able to attract that higher rent or the higher market rent from today. What we're finding is, similar to the comments I made in the presentation, a lot of tenants are making big investments and long-term investments in their warehouses at the moment, to maintain that supply chain resilience. That often means, you know, automation, sortation, or a high degree of fit-out. That's giving us good leverage in the lease renewal discussions, particularly if we want to strike early renewals.
Okay, great. Thanks.
Thanks, Richard.
Thank you for the questions. One moment for the next questions. Next we have Andrew MacFarlane from Jarden Group. Please proceed.
Hi, Jesse and team. Look, just one quick one coming in as a follow-up to Richard's. If you are pricing a deal today, so re yields on cost, so noting obviously your costs have been held fixed and so obviously the rent's going up, but if you were to reprice the cost today and to reprice the development yield on costs, what would that look like, i.e. what do you expect the yield on costs stabilized to be today, and how much costs still increasing at the moment?
Yeah. Morning, Andy. I think when we look at what our hurdle rates would be to either do development or acquisitions, we're considering what the incremental cost of debt is today. If you look at BBSW and that end with where margins are currently sitting, it's, you know, in the early 5% range. Where we're delivering our developments at 6% plus is probably where we would expect that to land. I mean, there's still a lot of challenges in delivering developments. There's still supply chain issues. There's still weather to contend with in certain markets. There's delays on infrastructure on certain other developments. You know, we're also mainly infield or brownfield developer as well. For our projects, I'd say north of 6% would be where we'd want to be seeing returns.
Got it. You are still seeing some inflation on the construction cost there?
Yeah. I mean, construction's moderated a little over the last few months, but it's still at significantly elevated levels compared to 12 or even 2 years ago.
Good. Thanks, guys.
Thank you for the question. The next question comes from Lauren Berry from Morgan Stanley. Please proceed.
Hi, Jesse. Good morning. Just wanted to touch on a comment you made in that you're continuing to monitor guidance in what's a bit of an uncertain environment. Are you able to just comment on what are the big swing factors that you're watching there, please?
Morning, Lauren. Yeah, look, I think we're sitting here on the 31st of January. We're yet to see what the movements that the central bank or the RBA does over the next six months. That's something that we're gonna be watching very closely, of course, as we look to continue to monitor guidance. We're also monitoring the property portfolio, and in reality, there's probably risk to the upside on where we head from a top-line rental income perspective. We're monitoring both of those factors as we consider the next six months.
In terms of the RBA rate rises, are you thinking, like, two more? Is that what you've got in the guidance?
I mean, I'm seeing probably the same forecasts you are, Lauren. Everyone's kind of in the same boat where we're unsure where the RBA may head in the next little while. We're unsure where any data that's pointed to inform those decisions will head. We'll continue to monitor. As of today, we're comfortable with where our forecasts sit in order to reconfirm guidance.
Got it. Okay. Just on the Telstra Data Centre, it looks like it got about an 11% decrease in valuation, despite having, you know, CPI-linked rental increases. Are you able to just talk about some of the assumptions that were made for that asset specifically?
That asset was externally valued by a third-party valuer to come up with those. What we saw, the biggest move on that asset was the 87.5 basis point expansion in cap rate. And that's in a valuer's opinion, reflective of the market value for that asset. I think this asset still has a very strong rationale to be in our portfolio. It's got good CPI rent reviews, which are a good driver of growth. And the asset also sits well above our acquisition price that we paid in 2020.
Okay. Got it. Just last one from me. Maybe just fast-forwarding 12 months or so, but the ICR had a bit of a, you know, a bit of a deterioration to 3.8 this period. You've got a couple of hedges rolling off. I imagine it would probably get lower in the next 12 months or so. Can you just talk about how you're thinking about managing the balance sheet around that metric, please?
Yep. Over the last six months, we've done a few things to further bolster the balance sheet. We obviously had AUD 215 million of divestments, which substantially reduced the amount of debt we're holding. We also put AUD 300 million worth of swaps in place, which have given us a lot more reliability in terms of where our cost of debt hedge, it heads with a 77% hedging across that. For the balance of this year, we've got very few hedges that roll off looking into next year. Again, we're gonna continue to monitor where the market moves. There's possibly some more hedging that we'll look to do over the next 6-12 months.
We'll continue to monitor the market, continue to manage the balance sheet, in order to stay within our covenants. Right now, we've got plenty of headroom to those covenants.
Great. Thanks.
Thanks, Lauren.
Thank you for the question. One moment for the next question. Next question, we have the line from Edward Day from MA Financial. Please proceed.
Yeah. Morning, Jesse. Just a couple from me. Firstly, just from your conversations with tenants, and it's sort of a continuation of some of the earlier questions, but have you got a feel for their utilization of space?
Morning, Edward. Yeah, the utilization is extremely high of these sheds at the moment. I think that's been demonstrated in the fact that we've seen so much gross take up over the past 12 months. In major markets of Sydney, Melbourne, and Brisbane, not a single one of those markets has vacancy greater than 1%. We're still seeing really strong pricing tension when it comes to tenants bidding assets up from a rent perspective in order to get their foot on them, particularly from an infill perspective. What we're also seeing, I've mentioned this a bit earlier, construction completions are being delayed. That is creating further tension in the market, where tenants who maybe had space that they needed to occupy this year maybe isn't getting delivered until 2024 or 2025 at this point.
That's throwing more demand back into the stabilized market where developments aren't meeting that future supply. Every occupier we talk to is not worried about low utilization of their shed. They've got extremely high utilization, and they're making further investments in their sheds to sweat them a little bit harder. Whether that be additional automation, whether that be sortation, robotics, that sort of stuff we're working with tenants, and I gave the example of Gregory Hills before, where we're working with tenants like that to either extend their leases to give them a sufficient amount of time to amortize that heavy investment as a result of them being able to be more efficient in their sheds.
Right. Thanks. Then just, I mean, clearly the market rent growth story remains, you know, robust. I'd just be interested in your view on cap rate movements over the next six months.
Yeah. I think there's a few things to consider on the cap rate. There's obviously cost of debt and where the 10-year bond settles over the next period. That's obviously gonna have an impact on where cap rates head. You know, I think the more important factor to be thinking about is actually market rental growth. On average, a 7% rise in market rents will offset about a 25-point widening in cap rates. In some infill markets, we're seeing 30% and 40% year-on-year growth. We think there is a good portion of value protection that will come from continued rise in market rents that will offset any further, if we do see further, cap rate expansion.
Yeah. Sorry, that 30%-40% growth or yeah, you're talking about in infill markets, yeah, have you actually captured any reversion at that type of level?
Yeah. One of the examples that we gave in the pack was our renewal at 82 Cosgrove Road, Mansfield. We completed some relatively minor refurbishment works on that property, and we achieved a 27% premium to the prior passing rent on that particular asset. That asset basically sits in the geographic center of Sydney. There are a number of examples across our portfolio where we're seeing those, you know, the bookends are probably 5%-50% in terms of where they're seeing spreads that build up that 20% or that 19% we've quoted.
That's great. Thank you.
Thanks, Ed.
Thank you. Thank you for the questions. There are no further questions at this time. I'd like to hand the call in first back to the management for the closing comments.
Thank you for your ongoing support of Centuria Industrial REIT. If you have any questions, please feel free to contact either myself, Michael Ching, or Tim Mitchell in our team. We look forward to discussing these in our one-on-ones over the next few weeks. Thanks.
This concludes today's conference. Thank you for participating. You may now disconnect.