Good morning, everyone, and welcome to GPT's 2022 Interim Results briefing. I would like to start by acknowledging the traditional custodians of the lands on which our business and our assets operate, and pay my respects to elders past, present, and emerging. Joining me for today's presentation are Anastasia Clarke, the Group CFO, Martin Ritchie, our Head of Office, Chris Davis, Head of Logistics, and Chris Barnett, Head of Retail and Mixed-Use. I am pleased to report today that the group has delivered a strong result for the half, and we remain on track to deliver at the upper end of the guidance range we provided in February. FFO per security was up 9% on the prior period to AUD 0.1704.
The interim distribution of AUD 0.127 is 4.5% lower than the prior period, largely as a result of an increase in leasing incentives as foreshadowed in February. NTA increased to AUD 6.26 per security, which is up 2.8% on 31 December. Revaluation gains for both the logistics and retail portfolios were the main drivers of the NTA increase, with the valuation of the office portfolio relatively unchanged since December. Valuation metrics for each of the sectors have not changed materially during the period, with the NTA uplift driven by rental growth and development completions. The group delivered a 12-month total return of 10.8%, reflecting an FFO yield of 5.2% and a capital return of 5.6%. Portfolio occupancy currently sits at a healthy level of 97.5%.
Our retail assets continue to see strong levels of customer visitations, and this is being reflected in positive tenant demand. Occupancy of the retail portfolio remains very strong at 99.3% and leasing spreads on expiry are continuing to improve. Leasing success during the period resulted in the occupancy of the logistics portfolio being maintained at close to 99%, while the office portfolio occupancy was slightly lower at 92%. Turning now to slide five. It has been an active period for the group as we continue to focus on our key priorities, growing the logistics portfolio through developments to deliver enhanced returns, lease-up of office space through focusing on changing customer needs, expanding the development pipeline, particularly for our funds management platform, and delivering on our sustainability goals.
Our logistics portfolio has grown to AUD 4.6 billion in value and now represents 28% of the group's diversified portfolio of high-quality assets. We have a logistics development pipeline with an estimated end value of AUD 1.9 billion that will continue to provide growth and high quality product for both GPT and the QuadReal partnership. We recently secured a new office development site in North Sydney, and the development of 51 Flinders Lane in Melbourne is underway. Both of these developments will provide new product for the office fund. Our mixed-use opportunities are being progressed, and we expect to commence the Rouse Hill mixed use expansion in the first half of 2023. Our funds platform is being expanded with the management of the AUD 2.8 billion UniSuper mandate being transferred to GPT from the 1st of September.
The addition of this portfolio enhances the scale of our retail platform, following the divestment of Wollongong Central and Casuarina Square. Finally, we continue to innovate and drive leading outcomes in ESG. Leadership in ESG is a key strategic priority and a point of difference for GPT. We have more carbon neutral certified floor space than any other Australian property owner, and we are on track for all our managed assets to be certified as operating carbon neutral by 2024. We have reduced emissions by 82% from our 2005 baseline by optimizing how our assets operate, investing in technology, and purchasing renewable energy. We're also targeting to achieve upfront embodied carbon neutral for the group's development pipeline. This involves eliminating or reducing embodied carbon through the design phase and the use of innovative construction practices and materials.
Embodied carbon that hasn't been eliminated will then be offset with high-quality nature-based offsets. We have secured our carbon credits through a partnership with Greenfleet and the traditional owners. The partnership supports the restoration of 1,100 hectares of Australian biodiverse native koala habitat. The project will generate carbon offsets for our operations and the embodied carbon for our development projects. Our recently completed Foundation Road project has been certified as Australia's first upfront embodied carbon neutral logistics development by the Green Building Council of Australia and Climate Active. 51 Flinders Lane will be GPT's first upfront embodied carbon neutral office development. The group's leadership in ESG is becoming increasingly important as tenants select assets with strong environmental credentials. In summary, we have delivered a solid set of results for the half, and we continue to deliver on our strategic objectives.
I'll return at the end of the presentation to provide my remarks on the outlook, and will now hand over to Anastasia Clarke to cover the financial results in more detail.
Thank you, Bob, and good morning. I'm going to start on slide eight. It is pleasing to be reporting a strong financial result for the six months to 30 June 2022. Our statutory profit of AUD 529.7 million is driven by funds from operations of AUD 326.5 million and valuation increases of AUD 219.5 million for the half. FFO per security has grown 9% on the prior corresponding first half. The result is driven by a strong recovery in retail, leasing in office, and acquisition and developments in logistics. Free cash flow is lower compared to the prior period, which is driven by a higher amount of lease incentives paid in office. The distribution per security of AUD 0.127 represents a 100% payout of operating free cash flow.
Looking to each portfolio's performance on slide nine in the segment result. The result builds on retail's track record of a strong rebound once COVID-19 restrictions were lifted. We commenced the year with Omicron and the COVID lockdown extension to March, and despite this, customers have returned, resulting in strong sales growth, lower vacancy in our centers, and lower COVID-19 tenant support being required. The retail portfolio result this half is partly offset by non-core asset sales, which were in the prior period income. Retail contributed AUD 145 million to FFO. Office net income grew by 10.7%, primarily through leasing of vacant space and through annual base fixed rent increases, delivering like-for-like growth of 5%.
Logistics contributed AUD 91.2 million of FFO, with growth driven from the upweighting to the sector through the acquisition of the Ascot portfolio and completion of fully leased new developments. Funds management profit grew 15%, driven by revaluation gains and developments in GWOF and our growing QuadReal partnership. Finance costs increased by AUD 9.8 million- AUD 54.1 million, primarily as a result of increased borrowings for acquisitions and developments. Corporate overheads and tax expense increased to AUD 32 million. This is due to one-off reorganization costs to streamline operations into three distinct divisions, and also due to higher cloud-based computing costs made up of IT projects and IT license fee increases.
Lease incentives have increased this period as we see the large office leasing volume achieved in the second half of 2021 flow through as incentives in the first half of 2022 as tenants commence occupation. Overall, we have delivered AUD 270.6 million in AFFO for the half. On slide 10, capital management. NTA has increased from revaluation increases to AUD 6.26 per security, and gearing has reduced to 27.3%. The group maintains significant liquidity of AUD 1.1 billion and a long average debt term to maturity of 6.3 years, with no material loan expiries until 2024. Our credit ratings remain unchanged since December and are in our target A space range.
We have added slide 11 to report on how we are addressing the impact of rising interest rates. Inflation has increased and become more significant than expected, and as a result, we have seen a significant increase in global bond rates this year in anticipation of central banks having to respond to curb inflation. This presented us with the challenge of having appropriate levels of fixed interest rate hedge protection versus the market curve cost premium, which would lock in a sizable cost increase to future earnings. With bond yields recently falling from elevated levels in June, we increased our hedging levels substantially in late July to provide a greater level of interest rate protection over the next 2.5 years. The chart provides the contracted hedge levels in place over the remainder of 2022 and each half through to 2025.
The table shows that the fixed hedge rate for 2022 full year is 1.7% and increases in 2023 to 2.6%. Overall, our interest rate exposure to FFO in 2023 is hedged at a base fixed rate of 2.6% for 80% of our current debt. From here, the pattern of RBA rate increases, the final peak floating rate, and any potential subsequent rate cuts remain to be seen. Our credit margin and fees above base fixed and floating rates remain stable at 160 basis points. Our forecast all-in cost of debt will be in the low 3% range in 2022 and is expected to be increasing to the low-to-mid 4% range in 2023, with a high level of hedge protection in place. In summary, we are well positioned for the forward period. For an update on our office operations, I will now pass to Martin Ritchie.
Thank you, Anastasia. Good morning, and turning to slide 13. The GPT office portfolio has delivered a strong result with first-half comparable income growth of 5% and segment contribution up 11%, driven by income from 62 Northbourne, Queen and Collins, and 32 Smith. The total return was 8.9% for the 12 months to June, and the weighted average cap rate is unchanged at 4.77% since December. Leasing of the portfolio is a key focus, with a total of 51,900 sq m of leasing achieved across 79 transactions, including heads of agreement. On slide 14, the chart on the left illustrates that tenant inquiry in the market is tracking above 2019 levels. Based on the number of inquiries, tenants under 1,000 sq m continue to be the most active.
While vacancy rates across the three Eastern Seaboard markets remain elevated at an average of 11.5%, we expect the increased market leasing inquiry to translate into net absorption of space. Tenant inquiry and activity shows the flight to quality. Prime grade net absorption continues to be well above secondary stock. GPT is therefore well-placed to capitalize on this due to its 100% prime grade portfolio and the significant investment that's been made in the assets over recent years. The right-hand graph indicates that face and effective rents are growing, while incentives remain elevated. Turning to slide 15. Work from home practices have changed how occupants use office space. Our expectation is that most companies will continue to value office space to attract talent, to collaborate, and to build company culture.
Our leasing strategy embraces this change by offering three distinct products, traditional space, premium suites, and space on demand. This appeals to a broader range of customers. Traditional space is the largest proportion of our portfolio at over 80%, as you can see in the chart at the bottom. These customers are attracted to our locations, amenity, and sustainability, and they're now seeking greater flexibility. GPT's flexible space on-demand product is called Space & Co. The slide gives you an indication of some of our larger Space & Co customers. Smaller companies and startups are also attracted by the exceptional amenity that we offer. We then develop relationships and incubate these customers whilst they grow into larger premises. Our premium suite product is space that's been designed and fitted out by us for immediate occupation.
The suites set a benchmark for high-quality fit outs to last several lease terms. We have delivered 43 suites over 18,000 sq m across the portfolio in the first half. Of these, 24 have been leased and 14 were just completed in June. We expect them all to be leased by the end of the year. The suites have achieved leasing success. Rents are 15% higher, downtime is 5.5 months shorter, the capital cost is in line with market incentives, and the lease term achieved averages 4.4 years. Moving to slide 16. Despite the Omicron outbreak and severe weather conditions, we signed 28,000 sq m of leases and over 23,000 sq m of heads of agreement in the first half of the year. Melbourne's been a key leasing focus, and we continue to reduce vacancy there.
For example, at 181 William 550 Bourke Streets, the asset was 55% committed at June 2021 and is now 81% committed at June 2022. The graph on the right shows that the portfolio has maintained an occupancy rate above the prime market average. On slide 17, our high-quality customer offering has positioned GPT well to increase portfolio occupancy. The team are targeting a higher leasing volume in the second half, supported by three factors. Firstly, the market is seasonal, with greater leasing volumes achieved in the second half. Secondly, we will deliver another 33,000 sq m of premium suites across the portfolio, including GWOF, which we expect to lease quickly upon completion. Thirdly, we've streamlined our leasing to respond to our customers faster.
Slide 18 shows that we've grown our development pipeline to AUD 5.5 billion, providing an opportunity for GPT and its funds to develop next generation assets and enhance returns. GWOF secured properties at Walker Street in North Sydney, where we are now working to obtain a DA for a tower of over 45,000 sq m with an earliest construction start in 2024, following the opening of the nearby Victoria Cross metro station. 51 Flinders Lane is underway with an expected delivery date in late 2025. Project commencements will be led by tenant pre-commitments and market conditions. The timing to commence is entirely within our control. Turning to slide 19. GPT was market leader in 2018 when GWOF committed to achieve carbon neutral operations by 2020, which we achieved.
GPT is again leading the market in committing to all new office developments being upfront embodied carbon neutral. I'm very proud to announce that 51 Flinders Lane will be GPT's first office development to be upfront embodied carbon neutral and certified on completion through Green Star and Climate Active. The Green Building Council of Australia has already verified the carbon neutral design commitment through the Green Star process. Turning to slide 20 for the office outlook. The demand for highly sustainable workplaces has increased, and GPT's certified 5.8-star NABERS energy rating provides a competitive advantage. We're on track for the entire office portfolio to follow GWOF's 2020 achievement and to be carbon neutral by 2024.
GWOF has grown to AUD 10.1 billion in assets under management and has low gearing of 18.8%. We have a AUD 5.5 billion development pipeline, providing an opportunity for GPT and its funds to develop next generation assets and to enhance returns. The office continues to play a crucial role to attract talent, collaborate, and build company culture. GPT's portfolio is well-located, presented, and serviced with significant investment made to create distinctive and desirable places. Our three space products respond to our customers' needs and provide them with the flexibility that they desire. Our offering, customer-centric approach, and well-resourced team will support a successful second half of leasing. I'll now hand over to Chris Davis to discuss the logistics portfolio.
Thank you, Martin. The logistics portfolio has delivered strong results in the half, with FFO of AUD 92 million, up 22% with growing contributions from development completions and acquisitions. Comparable growth of 2.4% was achieved, with positive income growth partially offset by vacancy, which has now been substantially leased. Our portfolio has high occupancy and 228,000 sq m of leasing deals were completed. We are capitalizing on market conditions with speculative development leasing in the half, achieving rents 9% above our feasibilities. The economic uncertainty has come at a time when the fundamentals of the Australian logistics sector are strong, with record low vacancy and the momentum in tenant demand driving rents higher. GPT's portfolio is well positioned to grow and capture market upside through upcoming expiry and a AUD 1.9 billion development pipeline. Turning to slide 23.
Two developments have been completed this year. Both are fully leased and delivered a yield on cost of 5.6%. Our partnership with QuadReal is progressing well, with three projects reaching completion and half of the AUD 2 billion fund target now committed. This includes a site secured in Melbourne's north on a 12-month delayed settlement that will deliver 134,000 sq m of prime space. Moving to slide 24. Demand for space has been dominated by transport and retail groups, and market rents have recorded double-digit growth over the past 12 months. Delays to the release of land and build-out of product has restricted supply, which combined with historically low vacancy, has constrained leasing activity.
In Sydney, vacancy of just 0.3% is forcing many tenants to delay new space requirements and focus on pre-lease options for late 2023 or 2024, providing favorable conditions for our Kemps Creek project. We have high levels of inquiry across our development pipeline, with our team engaged on 1.1 million sq m of tenant briefs, increasing from six months ago by a third. Over 80% of the inquiry is for groups growing their real estate footprint, upgrading to larger and more efficient facilities. An example of this trend is JB Hi-Fi, who are expanding by 50% within our Berrinba estate in Brisbane. Vacancy rates will remain low into 2023, underpinned by high pre-commitment levels of over 60% for stock under construction. Now on slide 25. We've had an excellent half with 228,000 sq m leased or at heads of agreement.
We have leased out developments well above the market rents expected when we commenced construction. This includes our underway project in Melbourne, leased at rents 19% higher than deals in the same estate last year. Within our operational portfolio, we've made great progress in leasing vacancy and upcoming expiry. Bunnings has leased 40,000 sq m in Melbourne, while Go Logistics has committed to 30,000 sq m in Sydney. Both are examples of expanding occupiers that add to the diversity of our customer mix. Moving to slide 26. We're implementing sustainability initiatives to maximize performance. We're excited to have delivered Australia's first upfront embodied carbon-neutral logistics development, certified by the Green Building Council of Australia and Climate Active as part of the building's Green Star design and as-built rating.
Through better design and material selection, such as low carbon concrete, we've reduced the development's carbon footprint, and we have then applied high-quality nature-based offsets for the residual. At each of our developments, we're installing solar and batteries, and for our existing assets, we're providing customers with the opportunity to access cost-effective on-site renewable energy. Moving to slide 27. Our development pipeline has expanded to AUD 1.9 billion and will deliver enhanced returns with a target yield on cost of over 5.25%. We are seeing high development costs, however, this is being offset by market rental growth. The two projects due for completion in the second half are 85% leased and a further two projects are underway.
The group's multi-stage projects in each of the key Eastern Seaboard markets are proving an advantage when engaging with existing and target customers as they expand their networks. Turning to strategy and outlook. Funds under management will grow as we deliver our developments and target a further AUD 1 billion of projects in the QuadReal fund. We have a highly capable and engaged team supporting the growing needs of our customers. Over 40% of our portfolio has been developed by GPT, demonstrating its high quality and our ability to expand through development. Our portfolio is concentrated to the Eastern Seaboard markets, which we expect to outperform nationally. The low vacancy and momentum of tenant demand will support strong rental growth.
With half of our portfolio to expire over the next five years, we are well positioned to capitalize on the market conditions, and our development pipeline, in partnership with QuadReal, provides further opportunity to enhance returns. I will now hand over to Chris Barnett to present the retail results.
Thank you, Chris, and good morning, everyone. The first half of 2022 has continued to build on the momentum and recovery that we experienced at the end of last year. All of our assets delivered exceptional sales growth, with our total specialty sales growing by 11.6% on last year. When compared to pre-pandemic 2019, our specialties grew by 6.5%. There continues to be a high level of conviction from our retailers, and we finished the first half with our portfolio occupancy at 99.3%. All of our leasing metrics have outperformed when compared to the previous reporting period. In terms of our financial performance, the result was substantially up on the first half of 2021, driven predominantly by our superior leasing outcomes and strong cash collections.
Now turning to slide 31, as Bob has highlighted earlier, we're excited about the opportunity to grow our retail assets under management to over AUD 10 billion following the selection by UniSuper to manage their mandate. The quality and composition of the UniSuper portfolio complement our existing assets, and we see real synergies from a leasing perspective, not to mention the benefits of scale that will derive from the combined platforms. Now turning to our leasing results on slide 32, where our leasing performance for the first half of 2022 has continued to build on the successes of last year. Our strong deal activity has resulted in an improvement in our portfolio occupancy. Our vacancies and holdovers are down, and we have materially improved our leasing spreads.
What's exciting about the high level of leasing activity is that we have transacted with over 76 new brands opening for the first time in a GPT center. Importantly, all of our leasing deals remain with base rents and fixed annual increases, and we have seen a return to longer tenure, with 4.6 years being the average term for all deals completed. Now turning to sales on slide 33. As shown on the top chart, excluding January, which was affected by Omicron, month-to-month sales have delivered strong growth on 2021. Total center sales were up 11.5% on last year, but more importantly, our total specialties were up 6.5% on pre-COVID 2019. In June, total center sales exceeded 30% on last year as it compared to a period of lockdown.
However, when compared to 2019, our total specialties grew by over 9%. Looking at sales in more detail, slide 34 highlights that every retail category has shown growth when compared to the first half of 2021. It's great to see cinemas return to normal, up 90% on last year, now that they can showcase exclusive product without restrictions. Health and beauty, dining, retail services, and most importantly, fashion, have all shown double-digit growth for the first half. Now turning to slide 35, where I wanted to provide an update on Melbourne Central's recovery, where sales for the first half were up 37%, and we've seen a continued improvement in center visitation. Comparing the month of June to pre-COVID-19, our total specialty sales per square meter were up 2%.
The center is benefiting from the return of university students with fashion, dining, and tech retailers all exceeding their June 2019 results. Our leasing team have continued to deliver first to market retailers who are choosing Melbourne Central to open their flagship stores. The successful recent opening of the Lego store, which is the number one in Australasia, will be joined by Under Armour, Calvin Klein, and the launch of the much-anticipated Monopoly Dreams later this year. Our outlook for the center remains positive, supported by the retail market's fundamental belief in the quality of the asset. Now turning to a development update on slide 36, where the performances of both Rouse Hill and Highpoint continue to support the commencement of their mixed-use developments.
Rouse Hill is on track to commence early next year with the project having extensive retailer support, given that the existing center has been fully leased for the past couple of years and total center sales exceeding the first half of 2019 by an impressive 29%. Off the back of securing the mixed-use master plan at Highpoint late last year, we will be lodging the stage one residential DA with 240 apartments and the stage one commercial DA for an 18,000 sq m office complex by the end of the year. Finally, turning to slide 37. GPT will continue to be a leader in ESG, and next week we will be launching our smart energy hub at Chirnside Park.
The hub is the first of its kind in Australia and will allow us to harvest energy from a solar array and store it safely on-site in a 2 MWh battery. The combination of solar generation and storage, coupled with our flexible load management, will generate considerable energy cost reductions and assist in stabilizing the grid. In relation to the GPT Wholesale Shopping Centre Fund, which has successfully executed on its strategy to optimize its portfolio of assets with the divestment of Wollongong Central and Casuarina Square. This has resulted in the fund having low levels of gearing, and it's well-placed to take advantage of any upcoming opportunities. Sales growth for the first six months of the year was strong. However, we do see this moderating as the impact of interest rates will curb discretionary spending.
Our view on the leasing market remains positive, and off the back of the solid sales environment, we believe our leasing spreads will continue to improve in the second half. I'll now hand you back to Bob to provide some comments on the outlook for the second half of 2022.
Thanks, Chris. I'd now like to turn to outlook and guidance for 2022. We have seen a rapid change in economic conditions over the last six months, with inflation expected to be in excess of 7% this year and the RBA responding more aggressively than we had anticipated. This will no doubt slow economic growth and consumption in time. However, unemployment is forecast to remain well below long-term averages, and inflation should retrace materially over the course of 2023. In line with rising interest rates, GPT's cost of debt will increase in the second half of 2022 and further in 2023. Higher bond yields may also lead to a softening of valuation metrics. However, this will be somewhat dependent on where bond yields settle.
While global and domestic investors continue to advise that there is demand for high-quality real estate, capital is sitting on the sidelines until there is greater clarity on the economic outlook. As you heard from Chris Barnett, we are continuing to see good momentum across our retail portfolio, with strong sales growth and leasing activity. Our portfolio has high occupancy, and while we expect sales growth to moderate, our portfolio is well-placed with fixed rental increases and positive leasing demand. For the office sector, we expect leasing volumes will improve in the second half of the year. Vacancy rates across the office sector remain elevated, but we are seeing demand from tenants who want to be in high-quality buildings with distinctive spaces.
We are providing flexible space and leading-edge fit outs in response to changing customer preferences, and this is achieving results. There is clearly a flight to quality as businesses use both flexibility and their workplace to attract talent. In logistics, market conditions remain very favorable, with elevated tenant demand, low vacancy, and constrained supply. We've expanded our development pipeline, and while development costs have increased with escalation in construction costs, this is being offset by strong rental growth. Our development pipeline in partnership with QuadReal positions us well for further platform growth. We have expanded the group's development pipeline, which will provide further growth opportunities for both the group and our managed funds. The office development pipeline provides an opportunity to create next-generation assets at the appropriate time.
Finally, the UniSuper mandate will provide increased scale to our retail and funds management platform, and we expect that this will provide further growth opportunities in time. Turning now to FFO and distribution guidance. We have delivered strong first half results, and while interest costs will rise in the second half, we expect to deliver FFO of approximately AUD 0.324 per security for the full year, which is at the upper end of our guidance provided in February, and a distribution of AUD 0.25 per security. That concludes our formal remarks, and I will now hand back to the operator for your questions.
Thank you. If you wish to ask a question, please press star , one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are using a speakerphone, please pick up the handset to ask the question. The first question today comes from James Druce from CLSA. Please go ahead.
Yeah. Good morning, Bob and team. First question is just around the tightening of guidance to the top end of the range. Can you just talk through some of the detail there?
Yeah. Look, thanks, James. Yeah, first of all, we think we delivered a strong set of results for the first half. I guess that has given us confidence on what the outlook looks like for the second half. You know, the key you know movers or drivers for the second half are really you know continuing to see good momentum within our retail portfolio, cash collections continuing to remain strong. We will see debt costs or cost of debt rise, as Anastasia flagged, in the second half. All in all, we've looked across our portfolio and we're pretty confident about the outlook for the second half and tightened our guidance to be at the upper end of the range.
Okay, maybe just touch on the contribution of COVID allowances and land taxes as well.
Yeah. I might ask Anastasia just to answer that one.
Sure. James, it is a combination of them both being lower. I know it might have surprised, and apologies if we've confused with our language, but COVID allowances are AUD 11.5 million lower in this first half result than the prior comparative, and land tax refunds are lower by AUD 1.7 million. Both are lower, and the net effect of AUD 11.5 million, less the reduction in land tax refunds of AUD 1.7 million, is the AUD 9.8 million we've described in the pack. Just to be clear, land tax refunds in first half 2021 were AUD 2.7 million, and in first half 2022 are AUD 1 million.
Yeah. Okay. That's clear. Maybe just one follow-up on the. Sorry, just on the question on the office sector. Can you just talk about how incentives have been changing over the past few months, and what your outlook is for the next six months?
Yeah. Thanks, James. Look, the average office incentive has been around sort of 35 to 40, probably averaging around that sort of 37% has been the average incentive. They've been relatively stable through the period. We haven't seen them move up at all. I think I would have reported about a similar number in February, and I think that's, they seem to have stabilized around that level.
Okay. Thank you.
Thank you. The next question comes from Caleb Wheatley from Macquarie Group. Please go ahead.
Good morning, Bob and team. Thank you for your time. My first question is just around potential for growth initiatives, particularly the comments around the balance sheet being well-placed. Where are you seeing the best opportunities between I imagine development is up there, but is something like a buyback now becoming attractive again at a 28% discount to NTA? Could you just speak through some of those growth initiatives you could be chasing?
Yeah. Thanks, Caleb. Look, certainly we're looking at all the opportunities to drive growth in the business, and we've been very successful in the build-out of our development pipeline and logistics, and we'll continue to do that. We think that makes sense for us. We do, you know, give thought to a buyback, particularly given where our security price has been trading. But given the current market uncertainty and the change in the cycle, we think it's we should be prudent with the use of our balance sheet capacity at the moment. When we last reactivated the buyback or activated the buyback, it was in the first half of last year, and we'd just sold Farrer Place. Our gearing was below our 25% sort of lower threshold.
We were expecting at that time for interest rates to remain really low. Clearly, the macroeconomic environment is really different today, so we wanna be prudent about how we use our balance sheet. As I said, we are continuing to undertake some developments, and we think that is a good use of our capital. Given we already own the land banks, the return of that incremental development spend will deliver at least the same NTA and earnings accretion as pursuing a buyback. We're comfortable with that decision to actually continue to deploy capital into some of those developments. It's something we continue to monitor and look out for how we you know drive further growth for the business.
Just in terms of those relative returns within the development books, you've obviously flagged the greater than 5.25% in the logistics development pipeline in terms of the yield on cost. How does that stack up against some of the opportunities in the office book? Are you seeing that logistics is a more preferable place given the returns there?
Yeah, look, the 5.2% I still think is an attractive return or yield on cost. Rouse Hill, the development for that we're targeting in excess of 6% yield on costs for that development as well. The office development's a little bit further out, so we've got a bit more work to do on those at the moment. They'll be really subject to market conditions and pre-commitment levels. A bit too early to speculate on what those returns will be just at this point. Certainly very comfortable with the returns we're getting out of logistics. Also, as Chris said, Rouse Hill has been delivering phenomenal growth for us in terms of sales out there, and we've got a modest expansion planned with.
It's a mixed-use expansion, and we think that will deliver a year-long cost in excess of 6% as well. We think that's an attractive use of capital.
Yep. That's clear. Thank you. Maybe just the final one from me, just around the comments regarding office leasing volumes going to improve. What does that mean for, I guess, incentives and occupancy across the GPT book? Do you think that that'll begin to, I guess, recover, for the back end of this year as leasing volumes improve? Or, is it still gonna be potentially a bit of a delay between the two?
I'll ask Martin to give you a little bit of color on what he's seeing in leasing inquiry coming through and the question you've just raised. Martin.
Yeah.
Mm.
Yeah. Thank you. We are seeing increased levels of inquiry, currently for our assets, and we do expect that to start to translate into higher levels of leasing deals. One of the key areas, of course, is that we've invested quite heavily in our buildings over the last couple of years, so they are in a very attractive state. Our premium suite strategy is something that tenants like 'cause it's immediately occupiable, and that leads to more rapid leasing take-up and leasing transactions.
Able to just speak through the premium suite strategy and the economics there. Is that more just a method of, I guess, accessing a new part of the tenant market? Or is it actually potentially a higher returning if you can, I guess, execute?
Yeah. I guess, I mean, the starting point for the premium suite strategy is that that size tenant makes up about 40% of the market, but we're only exposed to about 10% of it. We took the view it's a very active part of the market, and if we could deliver the right kind of suites, that we could lease space more quickly. I think our results demonstrate that we're probably 15% better on rent, 5.5 months better on downtime, and we're delivering them for around the same price as a market incentive. It's been a very strong strategy that I think has got plenty of capacity to continue.
I think it also creates momentum with the assets as well, when you're seeing space being leased up, that generates inquiry, you know, in addition to it, you know, as part of that momentum story. Look, there's no doubt the market is challenging, but this part of the market seems to be more active, and that's why we're certainly pursuing it, and we think the returns, you know, are good. They'll make the assets more resilient in the longer term as well, where you won't have as many sort of larger, lumpier sort of expiries. We think it's a good strategy for us to pursue.
It sounds like on a net effective basis, you're maybe doing a little bit better on base rents, no change in your, I guess, your incentive outlay there. Should be, I guess, economically better off doing these.
Economically, yes.
Types of things.
That's exactly right.
Yep.
Economically, we're getting better returns by pursuing this strategy. Look, that doesn't mean we're pursuing that that's the only strategy. We still have our traditional space that we'll be continuing to target the mid to larger size tenants as well.
That's great. Thank you for your time this morning.
Thank you.
Thank you. The next question comes from Sholto Maconochie from Jefferies. Please go ahead.
Oh, hi, everyone. Just a couple from me. In July, post balance date, you entered into the new interest rate hedging and swaps. Can you talk about how much that cost, that's gonna be below the line in the second half?
I'll get Anastasia to answer that, if that's okay.
Hi, Sholto.
Yeah, sure.
Well, they're at-the-money swaps. They're just vanilla fixed interest rate hedges. There is no capital spent. There's no optionality. They're callables. We've been quite deliberate in our reporting that they are fixed rate hedges. In late July, you saw the market swap curve reduce to 3%, which we thought was an opportune time to add substantial hedging. We've added 40% hedge level over the next three years. That compares, say, that 3% to a recent peak in early June, mid-June of 4.2%. Of course, rates are back up now at around 3.6%.
We had been less willing to add hedging where we felt the market curve was at a significant premium to where, say, bank economists' consensus forecast is, and even where the RBA comments are, which we felt was that circa 3% level by early next year, and that's why we put on substantial hedging.
There's no cost because one of your peers did some post-balance date AUD 600 million put into swaps, increased them because of the AUD 21.6 million. GPT has no capital cost at all to enter into increased hedging.
We have not spent a dollar in capital on interest rate hedging or any dollar of expense other than just a normal fixed rate hedge, which is the market rate, and you'll pay it over time, in terms of what that fixed rate is.
Okay, great. Thank you for that. Just on the guidance, it looks good. You had a strong first half. Thanks for clarifying that on the land tax and the COVID charges. It looks like earnings going back 10% second half. That looks to me that it's mainly all from the debt cost because I think you said low 3%, so if you assume sort of, I think, 2.5 % average for the first, sort of 3.75% the second half, that's about a AUD 30 million headwind in the second half. Is that why they're the main driver of the second half going backwards?
Yeah, that is the main driver, Sholto. We did also have a contribution in the first half from Casuarina for the first quarter of last year and so which we don't get in the second half, but the main driver is the additional funding costs.
What was the end of the cost of debt as at 30 June, Anastasia? What did that end up being?
We don't have any as at cost of debts because it's a period number. 2.5% first half, probably high threes, maybe 3.9% in second half, and that'll give you an all-in rate for the full year of that low 3% that I indicated.
Okay. That makes sense. Just finally on the incentives, I think you've done a lot of leasing in this half as you did a lot. It was very big in second half 2022 in office. The lease incentives will be a lot higher in the second half. You expect the CapEx incentives and maintenance CapEx to tick up in the second half?
I think it, assuming a similar sort of run rate in the second half is about right. No.
Okay.
I'm just being told no. What was that?
No, no.
Sorry?
Sorry, Sholto, I wasn't listening.
Oh. Oh, I'm sorry.
That's all right.
I was talking to someone else.
Oh, sorry, Bob, you're in trouble now.
Sorry. I am in trouble.
I heard you say incentives, and I thought you were talking leasing.
I think a similar sort of run rate in the second half. What we did see is, in the second half of last year, we did a lot of leasing. That flowed through into, incentives in the first half of this year. We're expecting for leasing to step up in the second half. Some of that will flow into next year, obviously, again, but we think a similar sort of run rate is not a bad approximation for the second half.
Oh, great. Thanks so much. Thanks so much for your time. Cheers.
Good.
Thank you. The next question comes from Grant McCasker from UBS. Please go ahead.
Good morning, Bob. The presentation you prepared, there's a lot of discussion on development in your pipeline. I think you spent about AUD 100 million over the half. What does that look like as we head into 2023 and 2024?
Look, that'll be somewhat dependent just on how the market conditions are. Our I guess in the second half of this year, I'd expect about a similar sort of run rate of capital being spent in development in the second half of this year, maybe a touch higher than that. I would expect from a logistics perspective, our run rate would be that sort of AUD 200 million-AUD 250 million per annum, and that's gonna be the main driver. On top of that, you've got Rouse that we would expect to get underway. That'll be a total spend of AUD 200 million over a couple of years. They're the key ones.
Okay. Thank you.
Mm.
Okay. We move to the second question, just looking at the balance sheet. Now correct me if I'm wrong, but in a lower interest rate environment, you know, you were more comfortable with the higher gearing. If we look back through time, GPT's generally run gearing below the lower end of the range. In the current interest rate setting and the outlook, do you look to sort of run the balance sheet differently to you've run it over the last 12 months?
Look, I think first of all, we are being quite cautious about deployment and capital usage, given, you know, the current market volatility and the uncertainty that's out there. We've said, you know, we've been comfortable to run in that, in the 25%-35%. Our target range is 25%-35%, and to be in the middle of the range. I don't feel uncomfortable with that from what we see today, being in the middle of the range. If we're starting to look like going above that, then we would, you know, certainly want to take some measures to bring it back down to at least the middle of the range.
Okay. Thank you.
Thank you. The next question comes from Simon Chan from Morgan Stanley. Please go ahead.
Oh, good morning, guys. Bob, I wanna pick up from where you left off in your last slide. You talked about how higher rates may lead to softening of valuation metrics. Just wondering, which sector do you think is most vulnerable to a softening of valuation metrics first?
Well, first of all, I think it's very hard to predict where things will move, and we haven't seen a lot of transaction activity, or it's slowed considerably over the last few months. Investors and capital are sitting on the sidelines looking for a bit of price discovery, so it's a little bit hard to say. If you look over the last five years, we've seen, I guess, asset pricing benefit from lower bond yields. They are rising, so you'd expect some symmetry to that. In terms of the sectors, I think logistics is probably the one that's got stronger rental growth, the strongest rental growth outlook coming out of it, so it would probably be best positioned.
In terms of the other two sectors, I would expect we're still gonna see rental growth out of both of them. We're still seeing face rental growth in office, and we're certainly seeing rental growth in the retail sector. The degree to which they might change is really just dependent on, I guess, where bond yields settle and in that how much offset you get out of the rental growth that will come through. I would say logistics will probably hold up the strongest.
Okay, fair enough. My next question's on retail. I know Chris talked a good story on, you know, Rouse and Melbourne Central, et cetera. But just looking through the data pack, it looks like there is some divergence of performance, like, Penrith and Charlestown were clearly not as good. Just wondering if you could, I guess, give us some color as to what led to divergence of performance across some of those other centers.
Yeah. Chris, would you like to answer that?
Happy to. Simon, thank you. If you look at Charlestown and Penrith, I think both of those assets were heavily impacted by Omicron in January this year. Most of the portfolio had a couple of weeks where it was affected, and then we came out strongly in February. I think both of those assets being almost classified as sort of non-metropolitan Sydney did have a greater impact of the Omicron virus in the first sort of couple of months of the year.
Okay. It's a January, Feb issue rather than a first half issue, essentially.
Oh, absolutely. Absolutely.
Great. My final question, just in relation to Cockle Bay. The disclosure seems to suggest that your share of the development CapEx has now gone up. I think it's now close to AUD 500 million versus AUD 414 million six months ago. Just wondering what's the reasoning for that. Is that just simply higher construction costs or have you guys decided to add more square meter?
I might have to take that one on notice, if that's all right. Simon, I'm not actually sure of that answer, so I'll take that on notice and come back to you on that one if you don't mind.
Not a problem at all. Thanks, guys.
Thank you.
Thank you. The next question comes from Lou Pirenc from Jarden. Please go ahead.
Good morning. A few follow-ups. It's probably somewhere in the pack, but what's the total COVID allowance in retail? I know it's down 11.5 on last year, but what was the total amount?
Lou, it's actually +0.2% in retail. It was - 11.3% last year, and that swung to + 0.2%. An AUD 11.5 million reduction in this first half result from COVID allowances. Across the GPT Group, it's actually minus 0.7%, just from a few other small amounts in office.
Is that because you book rent from prior periods above the line there or because I imagine in the first two months as Chris alluded to just now, you would have had quite a few.
Yeah.
Allowances filled because of Omicron and.
Yeah, good question.
Store operating.
We gave abatements of around AUD 6 million in the Omicron relief required, and we had a reversal of ECL provisions from December prior periods that came through to offset that, delivering that result of + 0.2%.
Great. Thank you. Bob, following up on your question about wanting to keep gearing kind of in the middle end of that range. If revaluations kind of are worse than you're currently kind of anticipating, what can you do to keep gearing low? Would you sell more assets? You've been quite successful in selling some of, you know, non-core assets. Are there more to go?
Oh, look, we did sell Casuarina, and Wollongong, you know, recently. We continue to look at our portfolio and look at which ones will drive the best performance for the group. That is something we're considering. The bottom line is, at the moment, you know, investors are sitting on the sidelines looking for some price discovery. I think that will take some time before, you know, that settles out. It is something we are giving consideration to. Are there assets in the portfolio that we think, you know, we should move on to reinvest into, you know, new opportunities.
Great. Final one from me. I know you talked about logistics, the strong rental growth there, but if you look at the like for like number there, it's not that exciting. Is that a timing issue or what's going on there?
Yeah. First of all, we didn't have a lot o f expiry, yeah, in the period. We've got fixed rental increases of about 3.2% is the average fixed rental increase, contracted in the portfolio. We didn't have a lot of expiry, but the ones that we did, we had a little bit of downtime with them. So that actually pulled it back. The good thing is, I guess, we do have some expiry coming up in 2024 and 2025, and we would expect that we will benefit from the strong rental growth we're seeing and be able to capture that when that expiry starts to emerge in 2024 and 2025.
Thank you.
Thank you. The next question comes from Ben Brayshaw from Barrenjoey. Please go ahead.
Hi, Bob. Thanks for the presentation. I had a question firstly on serviceability. Perhaps it's for Anastasia. I was wondering if you could comment on compliance with the S&P rating. Obviously, there's been an improvement in serviceability for the last six months. How do you assess compliance on a cash flow basis with that going forward?
Sure. Well, we're not slavish to compliance with the S&P rating. We've always said that we target A space credit ratings. We are single A. We're on negative outlook, and if we were to move to A-minus, that is an outcome that is completely within our target ratings of A space. We are operating above the 12% FFO to debt that Standard & Poor's have as a line in the sand currently. With the increase in interest costs from the second half or more particularly in 2023, we will go below that 12%, which is their driver to move to A-minus. There are other considerations as well, such as business strength and diversification of income, et cetera, that goes with the portfolio growth. You may not see resolution of the rating to the downside.
Great. Thanks, Anastasia. Just finally, second follow-up question. Net property income seems to be a little bit above operating cash flow, just insofar as the net operating cash flow is concerned for the last six months. I was wondering if you could discuss the difference, please.
The cash flow has been impacted by some working capital timing and the lease incentives being more elevated in the first half from that office lease up reflecting second half last year coming through. In terms of the working capital receivables, for example, you have the shopping center fund has recovered strongly and has declared a distribution, but that remains a receivable to the group. You're not seeing it come through in until second half cash flow.
Can I just clarify, though, payments for leasing capital expenditure are a net investing cash flow. They don't go through the net operating cash flow. I'm just wondering why that would be a factor that would contribute to the difference.
Yeah. No, that's a good point, and I was really talking to free cash flow. We do have the difference in our net property income. We have rent-free income that is non-cash, and that does not come through operating cash flow. You do have incentives through that operating cash flow insofar as it doesn't come through that line, whereas it is in income.
Great. Thank you.
Thank you. The next question comes from Richard Jones from JP Morgan. Please go ahead.
Hi. I just want to clarify perhaps with Chris or Anastasia, just to understand the stabilized retail income, just how far off the first half numbers are we from that? I guess you kind of called out the abatements being flat. I'm just wondering how ancillary income and Melbourne Central income, what kind of upside you think you've got still to come through in those two items.
I'll kick off. You've seen the abatement ECL combination being slightly positive at 0.2. This is a very clean result of really reflecting nothing going on in COVID allowances. I think you're at a recovered position for the first half as a sense of run rate, and then I'll hand over to Chris to talk about Melbourne Central recovery.
Thanks, Anastasia. Richard, as we mentioned a little earlier, that Charlestown and Penrith have been affected in the first half. You would think that they should have a stronger recovery in the second half. Melbourne Central really is what is impacting us, and that's because the center currently is wearing a few vacancies that it historically has never had. As sales improve and traffic numbers improve, we expect to quickly lease those up and get back to a position of sort of full income by the sort of middle to quarter of next year.
Okay. Is there any quantum that you can talk about in terms of where you think or how much increase in stabilized income will still come through?
Sorry, Paul. I think it's a bit premature for us to give you that. What we are seeing, what we're really pleased to see is the, I guess, the recovery in foot traffic there, well, and certainly sales. It's a very, very strong recovery that is starting to flow through. And I'd expect that we'll be getting back to, I guess, closer to pre-COVID levels sometime in 2023.
Okay. Thank you. Just a final question. Just in relation to obviously the mandate you got from UniSuper coming out of the AMP business. Just wondering, there's obviously been some discussion that you are looking at the AMP Shopping Centers fund as well as this fund that has the stakes in the two big malls which have transacted recently. Just wondering if you could provide any color as to what GPT's thinking is on those two opportunities and what may be the steps to win management rights if possible.
That's a good question. First of all, I think we're very pleased, and I feel privileged that UniSuper's entrusted us with the management of their portfolio, and that's coming across from the 1st of September. We think it's a great addition to our platform, and we'll continue to hopefully add value to that. Also look for further growth opportunities with UniSuper in that platform. In terms of other components of the AMP platform, it's not, we're not able to really provide any color or comment on that at this point, Richard.
Okay. Thanks, Bob.
Thank you. The next question comes from Alex Prineas from Morningstar. Please go ahead.
Good morning. Thanks for the presentation. Just on the industrial development feasibility studies. You mentioned that you've been getting 9% higher rents than what you had in historical feasibility studies. Just wondering if you kind of automatically then bake that into that higher rent into future feasibility studies to get to that 5.25% assumed yield on cost.
Yeah, we are certainly factoring in those higher rents that we're achieving. We have seen, though, Chris Davis mentioned that we're seeing higher construction costs come through. We've seen construction costs escalate sort of 20%-25% in logistics over the last 12-15 months. That's ramped up significantly. Construction costs represent about 45% of your overall development cost. That rent growth we are seeing is offsetting the construction costs. I expect we're gonna see further than that, further growth now in terms of the rental growth. Once that comes through, we will obviously be delivering a higher yield on costs. What we're saying, 5.25% is the minimum we're looking to be able to achieve out of the pipeline.
Thank you.
Thank you. At this time, we're showing no further questions. I'll hand the conference back to Mr. Johnston for any closing remarks.
Well, thank you, everybody, for joining the call today and for your questions. Some of you will no doubt have further queries which we can address later today. We look forward to catching up for one-on-one meetings over the next couple of weeks. Thank you, everyone, for joining the call.