I'll now like to hand the conference over to Mr. Peter Huddle, CEO and Managing Director. Please go ahead.
Good morning, and thank you for joining us for Vicinity Centres' results call for the six months ended 31st of December 2025. Joining me on today's call is Adrian Chye, our Chief Financial Officer. Before we begin, I'd like to acknowledge the traditional custodians on the lands on which we meet today and pay my respects to the elders, past and present. I extend that respect to the Aboriginal and Torres Strait Islander peoples on the call today. I'll start today's presentation on slide 5. Owing to the continued success of our strategic execution, discipline focus on delivering our immediate, medium, and long-term growth priorities, and amid a supportive retail property sector fundamentals, I'm pleased to report that we have had a strong start to FY 2026.
Touching on the results themselves, Vicinity delivered a net profit after tax of AUD 805.6 million for the six months, up by more than 60%, reflecting growth from Funds From Operations or FFO, and a meaningful uplift in portfolio valuations. At 3.7%, comparable net property income growth reflects the continued strength of our portfolio metrics, having increased portfolio occupancy and achieved a leasing spread of +4.6%, representing the highest leasing spread reported since Vicinity's inception in 2015. Of note, strong cash flows generated by our retail assets were augmented by a lowering of cap rates, which resulted in AUD 407 million or 2.6% net valuation uplift. Consequently, our net tangible asset per security increased to AUD 2.52, up 4.8% in the half.
I'm particularly pleased to announce that we have irrevocably accepted IFM's offer to sell the residual 75% interest in Uptown to us for AUD 212 million. I'll share more on why we believe this is an exciting, strategically aligned, and compelling business decision shortly. We also exchanged contracts to sell Whitsunday Plaza and Gympie Central in Queensland, Armidale Central in New South Wales, Victoria Park Central in Western Australia, and several ancillary land parcels. Totaling AUD 327 million, these most recent divestments were executed at a blended 18.2% premium to June 2025 book values. We completed and opened successfully the first stage of the reimagined Chatswood Chase on 23 October , with the unveiling of this truly unique retail asset. Adding to this, just last month, we were delighted to welcome Kmart's headquarters to the One Middle Road office tower at Chadstone.
Having joined Adairs' head office team at One Middle Road, Chadstone is now home to an additional 2,000 office workers in weekday trading. Our investment strategy is clear. We are confident it remains fit for purpose, and we are executing it with precision, consistency, and importantly, with discipline. Showcased by our strategic and financial highlights today, we continue to actively reposition our asset mix, curating a more resilient and higher growth portfolio that is well-positioned to deliver sustained income and value growth today and for the long term. We are driving this via accretive acquisitions, important developments at our premium assets, and by divesting non-strategic assets at attractive pricing, where we are maintaining, if not strengthening, our strong balance sheet and preserving our sector-leading credit ratings. What's more, we are executing this strategy in an environment of favorable retail sector fundamentals.
As we've highlighted for some time now, population growth and increased household spending, together with limited incremental retail floor space, are collectively driving a growing shortage of quality retail gross lettable area per capita. This is increasing the fight for space in the best-performing retail assets that are owned and managed by retail property experts, which is in turn creating greater price tension and opportunity for superior rent growth. At 3.8%, comparable NPI growth delivered by our premium asset portfolio was modestly above the portfolio average, but was disproportionately impacted by burdensome taxes and levies. On a like-for-like basis, our premium asset portfolio delivered an impressive 4.6% NPI growth. At a solid 9.7%, premium leasing spreads achieved were more than double the portfolio average.
Our outlets were a standout, achieving a 14% leasing spread as retailers continue to expand their stores and increase sales productivity. The appeal of our outlet assets is reinforced by occupancy at 99.8%, where near full capacity and retailer demand is creating strong leasing tension. Perhaps of most significance, our premium assets are now generating retail sales of around AUD 17,000 per sq m, 26% higher than the portfolio average. Once again, reinforcing our view that we can sustain positive leasing spreads and rent growth. Since embarking on this strategy in late 2022, our focus on delivering leasing outcomes that drive real income growth from a more premium, higher growth asset portfolio has underpinned an AUD 1.8 billion uplift in total value of our assets, noting the uplift incorporates our developments on a stabilized basis.
This is despite a net reduction of 12 assets and a 20 basis points expansion in capitalization rates. As a strategically located CBD asset with immense growth potential, the acquisition of Uptown is strongly aligned with this investment strategy. Located on Queen Street Mall in Brisbane's thriving CBD, Uptown is a landmark retail asset with a long history and deep connection with Brisbane's retail identity. Today, Uptown acts as a primary gateway to the Queen Street Bus Interchange. Adding to this, the asset is expected to be a major beneficiary of sizable state-led infrastructure projects intended to enhance the connectivity of Brisbane CBD, notably in preparation for the 2032 Olympics. What's more, Brisbane CBD sits in a large and growing total trade area, but currently lacks a large-scale, full-line retail offering. We are confident we have the blueprint to fill this gap.
Securing full ownership enables us to mobilize and leverage our core competencies across development, execution, and project leasing, and accelerate the rejuvenation of the asset, and importantly, unlock its latent value. Our vision for Uptown is to introduce a retail, dining, and entertainment offer that, in many aspects, is akin to Emporium in Melbourne CBD. Naturally, this vision would complement the luxury offer we have curated at Queens Plaza, also located on Queen Street Mall. Commencing in calendar year 2027, we are anticipating a total project spend of between AUD 300 million and AUD 350 million. Funded by a mix of asset sales and debt, development returns are expected to be in line with our hurdle rates, being a stabilized yield on costs of greater than 6% and an unlevered internal rate of return of greater than 10%.
Furthermore, the net impact of the acquisition of Uptown and the asset sales announced today is largely neutral to FY 2026 FFO. The acquisition bolsters Vicinity's already unrivaled CBD retail portfolio and allows us to deploy our proven playbook, delivering superior and sustained asset performance and an outstanding retail destination for the broader Brisbane catchment. And speaking of asset performance, on an annual basis, our assets welcome more than 384 million visitors and generated in excess of AUD 18 billion in annual sales. After a strong H2 of FY 2025, where portfolio sales were up 3.8%, we are pleased to observe a continuation of shopper confidence and capacity to spend in our centers, with total sales up 4.2% in the H1 of FY 2026.
Specialty and mini majors delivered 5.1% sales growth for the half, reflecting both solid growth in specialty sales, as well as the value created by remixing strong-performing specialties into larger format flagship stores, notably across our premium assets. Our portfolio-wide approach to ensuring the retail offer in each center is contemporary and satisfies ever-evolving shopper needs, is showcased by the positive sales growth delivered by both our premium and core asset portfolios, up 5.3% and 4.9% respectively. The culmination of which strengthened specialty sales productivity to over AUD 13,400 per sq m. Every retail category and every state enjoyed positive sales growth for the half. Jewelry outperformed, growing an impressive 11% on the prior period, spanning all price points.
Jewelry was closely followed by leisure at 10.3% growth, which was driven by the popular athleisure category, recording growth of 10.8%, as shoppers continued to show a strong and enduring affinity for on-brand retailers in this, in these segments. The luxury category delivered positive sales growth for four of the six months, with luxury jewelry the standout performer, growing at 8.1%. The Black Friday sales event, which we increasingly consider as Black November, was strong, as retailer participation in the promotional event grows and as shoppers increasingly take advantage of pre-Christmas discounts. As such, we are increasingly of the view that November and December trading should be assessed together.
On a blended basis, November and December achieved 4.5% sales growth in the H1 of FY 2026, which compares to 4.9% growth reported in the H1 of FY 2025. As we look ahead, we maintain a cautiously optimistic outlook for the retail sector, premised on persistent strong employment, but somewhat tempered by the recent shift in the RBA's monetary policy settings on lifting interest rates and the ongoing prevalence of geopolitical uncertainty. Turning now to leasing, where our portfolio metrics showcase our disciplined approach to negotiating new leases, where the structure, tenure, and value of rent written strengthens our current and future income growth profile. We finished the half with occupancy at 99.6%, representing a 10 basis point improvement on June 2025.
At 76%, we maintained strong tenant retention, and we lengthened the average tenure on deals completed to 4.6 years, all of which reinforces the sustained demand for our quality assets in a market where retail floor space continues to tighten. We also achieved the strongest leasing spread since Vicinity's inception in 2015 at +4.6%, driven by exceptional performance across the premium asset portfolio. Also supporting income growth, we maintain the average annual escalators on deals completed at a healthy 4.7%. The confluence of our strategic leasing activity, maintaining occupancy and delivering positive leasing spreads amid a robust retail sales environment, has enabled us to grow rent while maintaining our specialty occupancy cost ratio. At 14.1%, our OCR continues to provide sufficient headroom for further rent growth. With that, I'll hand the call to Adrian to talk through the financial results in more detail.
Thanks, Peter, and good morning. I'll begin on slide 11. Statutory net profit for the half was AUD 806 million. This comprised AUD 351 million of FFO and AUD 455 million of statutory and other items, of which the net property valuation gain was the largest contributor. While FFO per security was up 1.3%, when adjusted for lower loss of rent from developments as well as one-off items, FFO per security was up 4.1%. Underpinning this robust result was comparable NPI growth of 3.7%, and excluding new and increased taxes and levies, comparable NPI was up 4.1%. Moving to external management fees. Due to the transition of a third-party leasing mandate and the divestment of co-owned assets, management fee income was AUD 2.5 million below the prior year.
That said, our disciplined approach to cost management provided a partial offset, delivering a AUD 1.4 million or 3.3% reduction in net corporate overheads. Our net interest expense reduced by AUD 2.7 million, largely driven by lower debt volume arising from asset sales and proceeds from the DRP. Turning now to valuations on slide 12. The net portfolio valuation growth was AUD 407 million or 2.6% for the six-month period. This represented the fourth consecutive half-year period our portfolio realized net valuation gains. Pleasingly, the net valuation gain was supported by both income growth and a meaningful compression in capitalization rates. Income growth was again a key driver of valuation growth, particularly for Chadstone, the outlet centers, and the CBD portfolio.
Cap rate tightening was a main contributor to valuation growth in the core portfolio on the back of heightened demand for higher-yielding retail assets. Overall, the weighted average portfolio cap rate tightened by 11 basis points to 5.5% in the period. Looking forward, we continue to expect that with resilient income growth, Vicinity's portfolio will continue to be well-positioned for future growth. Turning to capital management. Preserving our strong balance sheet and sector-leading credit ratings remains a guiding principle for Vicinity when managing and deploying capital. In a period of elevated development expenditure, the combination of asset valuation growth and proceeds from the DRP have ensured gearing remained at the lower end of our 25%-35% target range at 26.3%.
When adjusted for the acquisition of the residual 75% interest in Uptown for AUD 212 million, and the AUD 327 million of proceeds from asset sales announced today, pro forma gearing sits at a healthy 25.8%. We maintained our investment-grade credit ratings of A stable and A2 stable with S&P and Moody's respectively, and we continued to actively manage our funding risk. Our debt book is well diversified, with a mix of debt sources and maturities. And with undrawn bank facilities of AUD 1 billion, we have sufficient liquidity to fund all debt expires this calendar year and committed developments and acquisitions. Our debt maturities for FY 2027 of AUD 300 million is relatively modest.
That said, we are always monitoring debt capital markets for opportunities that support a lengthening of our weighted average maturity profile and a lowering of our weighted average cost of debt. Consistent with our disciplined capital management approach, our average hedge ratio on drawn debt is expected to be 89% for FY 2026 and 85% for FY 2027. Consequently, we are able to maintain our previous guidance of a 5% weighted average cost of debt for FY 2026. Our balance sheet remains a source of competitive advantage and strength and is a crucial enabler of our current and potential growth agenda. Thank you. I'll now hand back to Peter.
Thanks, Adrian. FY 2026 is an important year for development projects, both completions and new commencements. We have always held the view that investing in our assets is a critical driver of sustained earnings and value accretion, and we have consistently demonstrated our willingness to invest in accretive developments, both large and small. In fact, since 2019, we have actively allocated strategic investment capital to reposition assets through large, medium, and smaller projects across 70% of our assets. We have embedded this discipline, committed our own balance sheet, and successfully delivered development projects in arguably one of the most challenged construction sectors in memory. We have achieved this because we have the requisite organizational capability, where our expertise in development leasing and development property management integrate with our purposely assembled team of development specialists and deliver real income and valuation upside. This is not easily replicated.
Which brings me to our major transformation of Chatswood Chase. The opening of Stage One in October last year marked the beginning of a new era for this landmark asset. Stage One introduced 65 new retailers, spanning leading local and international brands across fashion, beauty, lifestyle, and dining. Among the prize list of retailers who are, have opened are David Jones' newest department store, flagship Apple, Mecca and Sephora, as well as an Australian designer fashion precinct featuring Zimmermann, Camilla, and Scanlan Theodore , alongside international brands such as Ralph Lauren, Hugo Boss, Armani Exchange, and Max Mara. Our Level Two precinct features on-trend athleisure brands such as Nike, LSKD, and 2XU, which are complemented by Australian fashion staples, the likes of Country Road, Seed, Witchery, and R.M. Williams.
Between the opening of Stage One on the twenty-third of October and December, Chatswood Chase welcomed 2.4 million visitors, who in the December quarter spent a total of AUD 119 million, and on a same-store basis, delivered 34% sales growth. The success of Stage One provides a powerful foundation for the highly anticipated launch of the second stage opening, being our eagerly anticipated luxury precinct, which I'm pleased to report remains on track to open from the fourth quarter of FY 2026. Anchored by over 20 luxury brands, the Stage Two opening will see us complete the retail re-imagination of Chatswood Chase and solidify the asset's status as the most prominent, compelling, and differentiated retail destination on Sydney's affluent North Shore.
At AUD 625 million, our investment in this project remains unchanged, and the return profile also remains compelling, with a stabilized yield of greater than 6% and an unlevered internal rate of return of circa 10%. As I'll come to shortly, our vision for Chatswood Chase extends beyond the completion of this project as we progress our plans to augment the asset's patronage with the construction of two highly bespoke luxury residential towers on separate sites adjacent but connected to this iconic asset, much like what we have done at Chadstone.
Since 2019, we have progressively enhanced Chadstone's patronage, and therefore, sales and income growth potential, with the construction of more than 50,000 sq m of A-grade office space, now home to more than 6,500 office workers, as well as a 250-bedroom, five-star hotel that welcomes close to 110,000 visitors a year. What's more, with the likes of Kmart, Adairs, and Officeworks selecting Chadstone as the location for their new headquarters, the caliber of office tenants the asset is attracting is testament to both the quality of the office space and the overall appeal of Chadstone as a highly sought-after, one-of-a-kind, retail-led, mixed-use destination. Together with the retail offer that places Chadstone amongst the world's best, Chadstone continues its evolution as a city within a center, where people come to shop, stay, work, dine, and be entertained.
In partnership with our co-owner, Gandel Group, close to AUD 900 million has been invested in the current and future growth potential of Chadstone, spanning the opening of the Hotel Chadstone in 2019, the construction and opening of the Social Quarter in 2023, the refurbishment and opening of Chadstone Place office tower in 2024, now home to Officeworks headquarters, and the construction of the One Middle Road office tower, opened in 2025, now home to headquarters of Adairs and Kmart, and which seamlessly integrates into a first-of-its-kind, truly unique fresh food and dining precinct, the Market Pavilion, as well as a significantly elevated and bespoke laneway dining offer. In fact, every development, both large and small, has reinforced Chadstone as an all-day, every-day, retail-led destination. While we are never done, our multi-year strategic investments has consistently added to the scale, significance, and leadership of this remarkable asset.
Turning now to the redevelopment of Galleria in Morley, Western Australia. Comprising a new and immersive entertainment, leisure, and dining precinct, as well as a significantly elevated and contemporary fashion offer, this important redevelopment will deliver a completely refreshed customer experience for Galleria's large and loyal customer base in and around central Perth. Importantly, construction and leasing are progressing well, and we remain on track to complete the project in time for Christmas this year and deliver on our previously stated project costs and development return targets. While the larger, more transformational developments continue to shape our retail destinations, I've always believed that what's inside the box creates the most enduring value. In this context, we have maintained our commitment to consistently refreshing and contemporizing our retail offers across all of our assets, and in doing so, creating growth opportunities for our highest-performing retail partners.
At Emporium Melbourne, we recently expanded, refurbished, and opened Uniqlo's flagship store. At more than 4,500 sq m and having opened in November 2025. This store has reclaimed its position as the most productive Uniqlo store in their Australian stable. At Mandurah Forum, we've recently refurbished a former David Jones department store space with the introduction of Rebel and Timezone. Opening in September 2025, the combined 3,300 sq m Rebel and Timezone introduced two market-leading sporting and family entertainment offers to the center, and a new and exciting proposition for the trade area. This reconfiguration of former major space has delivered a 20% uplift in sales productivity across the October to December quarter, with an almost equivalent level of rental uplift, thereby demonstrating the value that can be unlocked when retail space is strategically repositioned.
While only two examples of many, Uniqlo at Emporium and Timezone and Rebel at Mandurah provide a powerful example of the mutual value that can be delivered when we invest in and cultivate strategic long-term partnerships with retail category leaders in Australia. Turning now to a brief update on our mixed-use development opportunities. As we have shared previously, we continue to advance our mixed-use strategy with a particular focus on residential opportunities that are strongly aligned with state government housing priorities, that importantly, have the potential to deliver meaningful long-term value creation for Vicinity. Two opportunities are now firmly in the spotlight: Chatswood Chase and Bankstown Central.
Both assets have been identified as ideal sites for higher density residential development, and both assets have secured support of an accelerated state planning pathway by the New South Wales Housing Development Authority, which is ultimately intended to streamline and expedite approval processes. Our early plans for Chatswood Chase contemplate around 480 luxury apartments across two separate towers. Relative to Bankstown Central and other assets in our portfolio earmarked for potential mixed-use development, at this stage, Chatswood Chase likely represents the most near-term opportunity for us. Just on Bankstown, in Sydney's west, our initial plans envision more than 1,500 apartments across seven towers on a sizable 23,700 sq m site, immediately adjacent to the retail center.
Of significant benefit is that Bankstown Central sits in the heart of the city of Bankstown, directly connected to the new metro station and proximate to major tertiary and medical precincts. As I've said before, while approvals create the potential to unlock significant value at our assets, we will continue to retain complete optionality in terms of how and when value is unlocked. Before I provide an update to our FY 2026 earnings guidance, let me reinforce that delivering predictable and growing income for our security holders, while simultaneously driving capital growth over time, remain at the core of our business decisions and investments. For the past three years, we have been focused on increasing the momentum of execution across the organization and ensuring that every action we take supports earnings resilience and sustained value accretion over time.
I think our results to date demonstrate our investment strategy is working as intended. Closing now with a positive update on FY 2026 earnings guidance. As Adrian and I have outlined in some detail, we've had a stronger than anticipated start to FY 2026, and pleasingly, the upside to our expectations is entirely driven by the continued strength of our leasing outcomes and portfolio metrics, including an increase in percentage rent. The confluence of which underpin an uplift in our expectation for FY 2026 comparable NPI growth to 3.5%, which has in turn enabled us to guide to around the top end of our FFO and AFFO per security guidance ranges of AUD 0.15-AUD 0.152 and AUD 0.128-AUD 0.13, respectively.
Meanwhile, we continue to expect our full-year distribution payout ratio to be within the target range of 95%-100% of adjusted FFO. And finally, I know I speak on behalf of Adrian, our board, and our executive leadership team when I say that it is a privilege to lead the team at Vicinity and to share our strategic, operational, and financial progress with the market. We'd like to acknowledge and thank everyone who works for, partners with, and is associated with Vicinity for their ongoing contribution and support. Thank you. Operator, I will hand the call over for Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone and wait for your name to be announced. If you would like to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Solomon Xiang from UBS. Please go ahead.
Morning, Peter, Adrian. Thanks for your time. First question was just on Chatswood. Just wanted to hone in on the 25 December passing yield, and maybe just the proportion of the asset that is income generating at this point in time, and maybe just an update on the expected path to get to the 6% stabilized yield on cost, please.
Hi, Solomon. Peter here. Yeah, if I got the three questions right, there's just a bit of noise coming over the top. So, yep, the stabilized yield is about- is 6%. What we do is we run that stabilized yield over a three year period. So essentially, by the end of FY 2026, we anticipate round about of r oughly about a 4% return that leads into a 5% return next year then stabilizes in early FY 2028. That all depends, Solomon, really on how much potential assistance but we may need to provide, or also in terms of the lease-up. In terms of the lease-up, by June of this year, we'll be 95% opened and operating, in terms of Chatswood.
So we mentioned in these results that we'll commence opening the second stage, which is really the luxury opening from the start of FY 2026, and we expect that to be majority- majoritively complete by the time we have a chat again in August. So again, around 95% of it will be open. In terms of income, it represents broadly about the same amount of income by the end of this fiscal year. So I might have missed another question.
That was all good. Second question is just on your premium portfolio. It's obviously printing very strong productivity numbers, circa 20% higher than the rest of the portfolio. But just looking at slide 26, when you look at the occupancy costs, they're only marginally above the portfolio average. So I mean, is that the appropriate spend, do you think, or what sort of, I guess, occupancy cost do you think is appropriate given the productivity of that premium portfolio?
Yeah, Solomon, we, we can potentially provide you a number that separates it out. The key differential is we put all of our outlet bi- business in the premium portfolio. That typically works on an occupancy cost of around 12%. So, just the nature of that business model, the retailers operate on a lower occupancy cost ratio. We're driving significant dollar per sq m sales through that, and in terms of revenue, we've driven revenue through that, that outlet business substantially higher in the last five years. But the occupancy cost ratio for that business, right now is around about 12.8%. If you exit that out, the occupancy cost ratio for the premiums would be higher than our average.
Yeah. And do you see much, I guess, headwind to getting back to your pre-COVID occupancy costs?
Look, we're confident. We've been t he pleasing thing I would say, Solomon, is we've been growing our leasing spreads and growing our rent, growing our NPI through the course of the last few years, and the occupancy cost ratio has also been maintaining broadly similar. So ultimately, that essentially means the retailers have had sustainable growth through that period of time as well. You know, all but we don't know their current profits through their current reporting season. So ultimately, it gives us confidence we're able to continue to grow our revenues through the portfolio.
Thank you very much.
Thank you. Your next question comes from Daniel Lee, from Jarden. Please go ahead.
Oh, hi, Peter and Adrian. Just a question on your Uptown development. Appreciate it doesn't start until 2027, but construction costs remain pretty elevated in Queensland. Just wondering how you're getting comfortable on your underwrite there, and if you have any provisions within that, within that underwrite?
Yeah, Daniel, it's Peter here. It's a fairly broad range that we gave at AUD 300 million to AUD 350 million. We've obviously in the process of concluding that transaction to have 100% ownership, not too dissimilar to what we did at Chatswood, to be honest. In terms of the underwrite, we've spent a lot of time with at least three of the key contractors within the Brisbane market to really understand the capacity within that market, in the subcontracts or the trades that we need to execute that job. In the next update, we will provide even further comfort to the market in terms of how we've de-risked that project and given confidence within that range. We've done a lot of work on this project previously as well.
At this particular point in time, there's a window that we want to hit. That's what we've guided to here, is really to commence that project in calendar year 2027, finish it before the end of 2028. At this point in time, we're comfortable with the, the ranges that we provide the market.
Thanks. And just on corporate overheads, it looks like they were down 3.3%. Maybe if you could just give us some color as to what the drivers were there and how you want us to think about corporate overhead growth moving forward.
Yeah. Thanks, Daniel. Adrian here. Yeah, corporate overheads, a key driver of that was probably some cost discipline, that we have, you know, tried to stay focused on in the business. We also do have the benefit of some capitalized costs, or co-capitalized overheads in relation to development personnel, given the elevated development expenditure at this point in time. We do expect the H2 to increase a little bit. So I guess from an overall, full year perspective, we're probably expecting corporate overheads to be in the high 80s. And into next year, as we continue to reduce our development spend in FY 2027, we probably expect a little bit of an unwind into FY 2027 as well. Of course, you know, we'll continue to maintain that cost discipline. Hopefully, there shouldn't be a significant increase into FY 2027.
Okay. Thanks very much.
Thank you. Your next question comes from Simon Chan, from Morgan Stanley. Please go ahead.
Hey, good day, Pete. Good day, Adrian. Hey, it looks like Chatswood Chase presumably has jumped the queue in terms of mixed use. I think, you know, over the last few years, you've been promoting Bankstown, Buranda, and all that stuff. And in your prepared remarks, Pete, you talked about how you want to leave optionality and et cetera, et cetera. Can you just talk to w hat's the realistic timing for Chatswood Chase resi? And if it's not imminent, what are some of the things that actually need to happen for it to take effect?
Yeah. Hi, Simon, it's Peter here, and I know it's dear to you being a local to Chatswood as well. So, so the likely so I, we are in the government facilitation process via the what's acronym name is the HDA process, which is a fast-track process for rezoning and to be DA to be then shovel-ready. Our expectation, even going through a fast-track facilitation process, from where we are today, we anticipate that it's still towards the end of next calendar year for a DA to be actually approved through that process. And then you have, even on best case scenario, pre-development activity around design documentation to get you ready for construction.
So, the best case scenario from our point of view is 2-2.5 years away from being in the ability to shove a shovel in the ground, so to speak. That said, we still think it's a tremendous opportunity. Why did it jump ahead of others? Primarily, and we haven't fully baked this out, but, on our numbers today, just given the level of potential sales that can be achieved through a suburb like Chatswood, it's the most valuable opportunity that we're looking at across our fleets of residential projects. But again, it's a couple of years away from commencing, and that's why we're giving ourselves time to ensure the approvals that we get add the most value.
I think I've mentioned before, Simon, we would be looking for partners to execute our residential platform as well.
That's very clear, Peter. I just got one more. Chatswood Chase, the yield. I think in your answer to one of the previous chap's question, you know, if 26.4% leading to 5% next year and 6% the year after, it is effectively fully leased anyway, and you start collecting rent from day one. I get it. You also said it depends on how much potential assistance you may need to provide, right? So, you know, that's why there's a glide path. But, you know, level one's essentially open now. Do you have a better picture of how much potential assistance you actually need to hand out?
Or, the other way to word my question is: Is your 4% going to 5%, going to 6% over three years, a little bit too conservative?
I'd like to think so, Simon. And same with Chadstone. So we always put a stabilization number in. There's not a huge amount of science that go around that stabilization number. It's a provision, it's a percentage of total specialty rent that we is a declining percentage over a number of years. But in terms of Chatswood, yes, the ground lower level is open, ground level is open, level two is open. There is some step rent in those openings until the level 1 opens, which is the luxury precinct. And there's also annualization of the rents that have opened through FY 2026. So to your point, we're confident, we're happy with the way that Chatswood's performing at the moment, particularly since our opening on October 2023.
If luxury hits the mark like we think it's going to, we'd expect to have less stabilization moving into FY 2027, and in particular, FY 2028. I don't have those specific numbers for you. I mean, if required, we can catch up and give you a bit of a heads up what they may be, but I don't have them off the top of my head here.
That's right. But have you had to provide a lot of assistance to the tenants that have opened so far in level two or ground level, et cetera, or is actually tracking okay?
No, it's tracking as per our expectation. We always knew with level two there, because the level one is still to open, there would be some assistance, whether it's to the tenants or additional marketing activities. And we're very, very comfortable with the lower level and the ground level are trading very well.
It's very clear. Thanks. Thanks, Peter.
Thanks, Simon.
Thank you. Your next question comes from Howard Penny from Citi. Please go ahead.
Thank you very much. Just understanding the earnings impact of commencing Uptown and finalizing the developments that have just completed. Could you just give some detail on potential loss of rent in Uptown and of course, the capitalized interest and capitalized other costs as far as possible? I know that's more a next year story, but just giving us a feel for that, that loss of rent versus the capitalized costs that that'll be reduced off the current income statement.
Hi, Howard, Adrian here. I think with Uptown, I think as we mentioned, it's probably gonna be really a calendar year FY 2027 development story by the time we, I guess, get our plans in place and we kick off the development and where loss of rent would impact. At this stage, we're very confident around our FY 2027 guidance for loss of rent, which is AUD 15 million. We don't see that changing with commencing Uptown in calendar year 2027. We'll probably have more to say in August around what that future loss of rent profile looks like beyond that. Probably one thing to, I guess, emphasize with Uptown is, you know, we do have a very strong performing car park, which delivers actually most of the income to that asset today.
We're not expecting, as part of the development, that a large part of that, income from the car park is gonna be disrupted. So probably unlike, Chadstone or, Chatswood, the loss of rent impact from Uptown is expected to be a lot less, than those developments. And that's probably just one thing to keep in mind. In relation to, to overheads, capitalised overheads, capitalised interest, we'll probably give more of an update as we get closer to firming up those development plans.
I'll just add a bit to that, Howard.
Thank you.
I mean, you know our business very well. We're not giving guidance obviously into FY 2027 at this particular point, but clearly we've concluded Chadstone. Kmart moved into their office in January. Chatswood's will be 95% opening by June. They were the key developments that had significant loss of rent as we concluded those developments. You will see an uptick in revenues going into FY 2027, and then even though there's still important developments, you will start to see Galleria then start to annualize going into FY 2027, FY 2028, and then Uptown will then follow into that. So if it's helpful, we'll provide you a bit more insight into that, but you know, our anticipation, you'll start to see some real strong revenue growth.
Thank you very much. And then just talking a little bit about residential, you make a good point to say that you are, at this stage, it's the optionality that you've unlocked. But do you have any sense on whether you would fund this through third-party funds or development partners or any. Do you have any views on how best you would develop those residential opportunities?
Look, we'll look at each residential opportunity on a site-by-site basis, as well as other options. But Howard, our plan is to be capital light in terms of those opportunities. We're not known in the market as a residential developer. Our core capability and skills is retail development, leasing management, and all things associated with that. We like to ensure that we control master planning in terms of our sites, but in terms of execution and capital, we'd be looking for other partnerships to come in to help us execute and unlock the value of those.
Thank you, and congrats on the results.
Thanks, Howard.
Thank you. Your next question comes from Andrew Dodds, from Jefferies. Please go ahead.
Good afternoon, Peter and Adrian. Just a couple of quick ones. Firstly, just around some of the comments you made inside and some of the assumptions, comp and NPI growth expectations have been upgraded from, I think, 3% to 3.5%. Just interested to hear what sort of drove this movement.
It's Peter, Andrew. I'll be as simple as I can. We got increased rent, increased occupancy, hence less vacancy, and increased percentage rent. So it's all business fundamentals heading in the right direction.
All right. That's, that's clear. Thank you. And then just picking up on some of the comments around the Uptown development. Is it fair to assume that the underwriter is sort of assuming that it's got a similar stabilization period to that of Chatswood, so you know, maybe 4% trading to 6% over a three-year period?
No, good question. If I backtrack, when I first came to the company, we never used stabilization. So typically, we do now. We think, and across all of our projects, we are typically conservative, and hopefully, it trades better than our stabilization assumptions. In terms of Uptown, it'll be a different style of development than what Chatswood or what Chatswood is. It's planned to be a phased development, so we're not intending to shut the shopping center broadly down and then reopen it. It'll be phased over a period of 18 months to two years. But yes, there will be stabilization. If you're looking for a modeling type of scenario, as a working assumption, I'd put in the assumptions that you suggested, four, five, and six as working assumptions.
We would hope that in the essence of doing what we're doing for Uptown, that would be a conservative assumption.
All right. Thank you. And then just finally, on retail sales, I mean, the momentum heading into December, you know, is clearly very strong. I'd just be interested into, you know, if you can sort of speak to any anecdotes or, or sort of sales data that you've already picked up on throughout January and, and early February, you know, post RBA rate hikes.
Yeah, well, we, Andrew, we don't have any roll up of January and, you know, the, part of, part of our technology doesn't give real-time sales updates. In discussion with some of the retailers, and we're obviously very keen on seeing, their results, it is a little choppy from, in terms of January moving into February. And part of January and February will need to seasonalize because, Lunar New Year, which is such an important sales period, was in January in 2025, and, was last this week, essentially, for February.
So at this point, we're as keen as you are to really understand what the trend is post the, the, direction that the RBA went in terms of interest rates. At this point in time, all I could say is traffic still remains strong at our centers. So we'll see how that converts into sales over January and February, and we'll come back and report that in the Q3 update.
All right. Thanks, guys.
Your next question comes from James Druce from CLSA. Please go ahead.
Yeah. Hi, thanks for the presentation, Peter and Adrian. One very quick one: what was the yield on the AUD 327 million of divested assets?
Slightly over 6%.
Okay, and can you just talk to the NTA growth was pretty pleasing at almost 5% for the six months. Part of that, I think, was coming from the sub-regional portfolio, but can you just talk through the contributions of sort of market rent versus value assumptions and, and sort of the different movements across the categories, please?
I'll kick off, and I'm sure Adrian will s o of the 2.6% growth, about sixty-eight percent of that was really in cap rate compression. The rest of it was in income growth. Some of it was related to we, the assets that we're selling. We mentioned that they were 18% below our June book values, so we rebook it at the sales price as part of market validity of those sales price. That also led to market evidence for the valuers for similar type of assets within the portfolio.
Yeah, probably the only thing I'd add is, typically, what we do for developments is we'll, as the project goes through development, we'll change the valuation methodology to an as-if-complete basis, and we'll put a profit and risk allowance. For Chatswood, we released AUD 50 million of that profit and risk allowance. There's still over AUD 100 million of profit and risk to come through, in the next period, so that should aid further valuation growth and NTA growth in the future. But that was a contributing factor as well to the, 2.6% gain.
Okay, fantastic. Just on the tax drag from property expenses, is that sort of stabilized in the H2 or not?
It'll be annualized. It will stabilize in FY 2027. So to be specific, the taxes are predominantly congestion levies that have occurred in Victoria. It's the fire services levy, which was transferred from insurance to property taxes. I don't mean to beat them up, but again, in Victoria. And some incremental taxes associated with our land leases on airports that are in our premium property. So that will get back to normal growth from, to the degree that we can control them, in FY 2027.
Thank you.
Thank you. Your next question comes from David Pobucky from Macquarie Group. Please go ahead.
Good morning, Peter and Adrian. Thanks for your time. Just around the balance sheet gearing sits towards the low end of that range, with potentially, you know, more divestments to come. Are you seeing any further opportunities to acquire in this market, or is the focus now on development around Uptown and the resi opportunity?
David, it's Peter, and thank you for the question. Look, we're, we're acquisitive at the moment. We have a very strict strategic network plan across the country. We know we're underweight in Greater Sydney, and we know we're underweight in Greater Brisbane. That led to our decision around the acquisition and then subsequent development of Uptown. So if good opportunities come onto the marketplace, and we do anticipate some that will come onto the marketplace, then we'll, we'll assess them on their merits and see if we can add value to those, as long as they're at a attractive pricing. Similar to that, you know, we constantly review our own portfolio, and whilst we don't, whilst we don't, disclose divestments, it's not as if that we already have them.
We typically use assets that are not carrying their weight within our portfolio or don't have a strategic benefit for us to divest those assets to fund our growth opportunities, and that divestment may be at 100% or 50%. It also helps us moving up the premium scale of our portfolio, which generally, for us, moving into the larger, more fortified, so to speak, assets, allows us to deliver greater growth, which we've tried to highlight in the presentation as well.
Thanks, Peter. Maybe one for Adrian, just around debt. I know you're monitoring debt capital market opportunities. Can you just talk to any kind of refinancing that you've undertaken or expected to undertake and the margin improvement there? And where does your weighted average margin sit at the moment?
Yeah. Thanks, David, for the question. Weighted average margin for us is about 155 basis points. Bank debt margin's around 115, so we've actually done quite a lot of renegotiation of bank debt and cancellations, as well as, as we've been selling assets, to bring that weighted average margin down on bank debt. With the DCM margin, it's probably closer to 170-180. Some of that is with some of the nearer-term expiries. So you'll notice there's a 655 sterling that's expiring in April this year. That does provide us an opportunity to look at reducing our margin.
We are looking at a, you know, very liquid debt capital markets at the moment, and, you know, based on some of the secondary trading of our previous bonds and also looking at the market comps, you know, we think that there's very attractive margins out there as well. So, in terms of opportunities in the future, we are looking probably in that market, refinancing some of the expiring DCM to reduce our margins. As we said, we're pretty highly hedged in the future. So, we shouldn't expect too much from a floating rate impact. So hopefully we'll just get some margin compression going forward.
Okay, thank you for your time.
Thank you. Your next question comes from Richard Jones from JP Morgan. Please go ahead.
Oh, hi, Pete. Just wondering if you could tell us what the estimated end value is of the luxury retail at Chatswood Chase?
Just the luxury, the end value, Richard?
Yeah.
Yeah, Rich, I'm not quite sure of the question, but ultimately, luxury represents about, in broad numbers, it's about 25% of the income of Chatswood Chase. So, we'll have to come. We'll come back to you and let you know what component of the valuation the luxury may represent in terms of that, but that's basically what it is. The
Yeah, no, sorry. So my question was in relation to the luxury residential, sorry.
Oh, residential. Sorry. Yeah, we're just finalizing the numbers as we speak. But, and I know that's like I'd push a question down the road, but literally where we're in the process of commencing the pre-sales with appointment of agents. We're just validating what they anticipate to be the income levels on a BTS, which is likely to be Chatswood. And then it will depend on the final yield coming from the development approvals that we're achieving through the Housing Development Authority process. So a little bit too early. You know, we anticipate it to be a reasonable amount of residual land value coming from the two sites from Chatswood, but we're not releasing a number until we have those two things just locked in. Rich, sorry about it.
Okay, that's fine. Just in terms of, I guess, your strategic thinking around acquiring full stakes in assets and undertaking major developments, you've obviously done at Chatswood Chase, planning it at Uptown. Just, do you think these are a long-term, 100% hold assets, or will you look to introduce capital post, you know, hopefully extracting value out of the projects?
Well, we're happy to keep it 100% at this point in time. And, you know, take a situation like Chatswood, Rich. We want to prove the full cash flow potential of that asset to really realize the valuation that we think it should be, which is not the valuation that's in our numbers today, because we still hold profit and risk in that valuation until we deliver. And at that point in time, if there were opportunities, and if we needed the capital, and if Chatswood, for example, was an opportunity for us to transact in the market, then it's probably a. I would say it's a, it's attractive one to bring in a partner at that particular point in time.
But with a balance sheet currently at 25.8% on a pro forma basis, there's no pressing need for us to bring partners into either of those assets. And if they deliver better returns above, well, above the portfolio average, then why not just hold on to them at 100%?
Makes sense. Thank you.
Thank you. Your next question comes from Adam Calvedi from Bank of America. Please go ahead.
Hi, team. Look, the first one's on NPI growth. It's 3.7, H1, but got into 3.5 full year. I mean, occupancy is at the highest on record, leasing spreads are strong. Well, what's, what's going to be dragging it down in the H2?
Adam, there's a couple of things that are in there. We're putting some additional security provisions into our assets. We've been planning on this for a significant period of time. It's clearly a consequence of the nature of what's occurring across the country, highly publicized by the Bondi Coronial Inquiry. So we have upped our security provisions, and they haven't been annualized at this particular point in time. There might be a point associated with that.
And then there's also annualization of the glorious congestion levies that were implemented by the Victorian government, and a few other items, which are essentially just second-half items, to be honest, that are coming in. That would be the main things. We are anticipating that, you know, for context, we're still rolling into a full year leasing spread of around about 3%, hitting the H1 at 4.6%. If we do better than that, then there'll be some upside.
Okay, that makes sense. You know, just speaking of leasing spreads, I mean, I think Andrew Dodds touched on this, just the pathway back to pre-COVID occupancy levels. I mean, the 7% expiring, I mean, can't you, can't you really drive rents in some of these assets? There's really no supply coming online. They're quality assets. Appreciate you've got to manage a relationship with the tenants, but, I mean, I don't know how much power they have to really push back.
Yeah, Adam, now look, for us, it's got to be sustainable growth as well. Ultimately, Australia is still a fairly small market, in terms of the number of retailers, that's getting consolidated as well. It's got to be a sustainable relationship with, with all of us. If you look at our premium asset portfolio, you know, you're essentially driving spreads at 9.7%, and you've got the outlets growing at double digits, and that's been the last few reporting periods.
So for us, it's about managing appropriate growth through the course of a cycle, not only on income growth, but also on capital value. With the other thing that we've done, you'll see that there's a 76% retention rate. Obviously, there's a 24% retention rate, which is essentially introducing new product into or new tenants into our portfolio, which also helps to drive rents. I get your question, but we're actually quite happy that we have the capacity to grow rents based on where the fundamentals of the portfolio are on OCR. We just have to do it in a very managed way.
Yeah, look, just really quickly following on, how many more options do tenants usually have in terms of boxes and other sites to go into when they're looking at either renewing, or moving on?
Well, it's another good question. I mean, it's part of the reason why we're really focused on the premiumization of our portfolio, CBDs, outlets, the Chadstones, Chatswoods, Joondalups of the world, is because they are assets the tenants need to be in, period, in our view. So, there are other options there, of course, but there's more limited options for those assets than there would be in the neighborhood, sub-regional, or even the regional space.
Okay. Thanks, all.
Thank you. Your next question comes from Claire McHugh from Green Street. Please go ahead.
Hi, guys. Just a quick one on Uptown yield on cost, appreciating your IRR framework, too. So Brisbane's, you know, firing on all cylinders. Is the, is the 6% yield on cost more of a sort of a bear case scenario? Just when I run some of the numbers at the top end, at the AUD 350 million, and just look at relative rent, it just seems like even a mid- to sort of high 6% is still a conservative estimate. Just, just wondering how you're thinking about the underwriting there.
Claire, I need you to come in and speak to our leasing team. They would love that. It's an early stage. We've done an early stage sort of feasibility associated with it. There's still some work to do between now and probably year-end. At that particular point in time, we would hope that we're formalized in terms of the development approval that we would have lodged with the city. We know the city is very supportive, fantastic Lord Mayor there. But we also know that there's heightened construction costs within that marketplace.
Now, we found a window, and we understand the construction capacity, but you're still building into quite a heated construction market at the moment. So we're leaving contingency associated with the construction cost side as well. We understand that there is no full line, full scale, full line price offer within the Brisbane CBD. For us, being prominent in Sydney CBD, Melbourne CBD, and Brisbane CBD is essential, and we see. To your point, we see that the demand for the space will be strong.
Yeah. No, I take your point on construction costs. I understand, with union activity, productivity of construction workers is low in a national context. But anyway, in terms of just generally speaking, just touching on underwriting hurdles. So clearly, you know, real interest rates are edging up, which is weighing on, you know, cost of debt, but your cost of equity capital has improved and growth is stronger. So I'm just curious as to, in your internal IC committee meetings, how you're evaluating your underwriting hurdles, how have they changed over the last six months against that backdrop?
Hi, Claire. Adrian here. You're right. Obviously, in the last few periods, there has been a slight increase in expectation around interest rates. What we try to do is take a three cycle, longer-term view on our hurdle rates. We are conscious that sentiment changes around interest rates and cost of capital. So we try to look over a five to 10 year period to say, you know, "What is our underlying weighted average cost of capital?" We've therefore then said: Well, how do we also compensate for risk, particularly on developments, less so for acquisitions, where you've got known cash flows?
And typically, that drives that yield on cost of 6% threshold and then greater than 10% unlevered IRR. So I wouldn't say that's materially changed in the last six months, given that we've taken that through-cycle approach. Obviously, if volatility were to increase significantly or rates were to rise, you know, in a more material way, then we would look at changing those. But we do review them every six months as a matter of course.
Okay, thanks, Adrian. That's helpful. And then maybe just a final one, if I can bring it in. Just in terms of sources of capital, so is it fair to assume that this will y ou know, the capital rotation will remain front of mind in terms of disposing non-core assets? Or, you know, I know the DRP is on, your cost of equity now is pretty solid. You know, how are you thinking about your various sources of capital to fund the development?
Yeah, Claire, in terms of whether it's acquisition or development activity in the future, it probably still revolves around some divestment strategy. That said, you know, we've been very active and leading into that space, to be honest, over the last three years. And so the portfolio that we have at the moment is we're quite happy with. But ultimately, if there's other opportunities that come along, whether it's the Uptown development or an acquisition, that on a risk-adjusted basis delivers us higher returns, there is a small section of the portfolio that we potentially may unlock some value and might even be bringing in a joint venture partner to fund those developments.
That's something that we assess basically biannually, just in terms of the forward return of each asset within our portfolio, just making sure that they're pulling their weight. The DRP, as you mentioned, it provides us just with an extra funding source opportunities, an extra lever to look for opportunities. And in terms of gearing at the moment, we're obviously very comfortable with where we sit, particularly on a pro forma basis.
Okay, that's helpful. Thanks.
Okay, I don't think there's any further questions. So look, on behalf of, Adrian and myself, a big thank you, firstly, to the Vicinity team for putting these results together or delivering these results, to be quite frank. And then secondly, to, all the analysts and investors on the call today. Look, a big thank you for your interest in our company, and we will continue to do our best to continue with, positive performance, for you and for us, to be honest, into the future. Look forward to having a chat to you as a follow-up from this results call. Thank you again.