Thank you for standing by, welcome to the Precinct Properties 2023 half-year results. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Scott Pritchard, Chief Executive Officer. Please go ahead.
Thanks, Ashley, good morning, everyone, and welcome to the 2023 half year result briefing for Precinct Properties. I am Scott Pritchard, I'm joined today by George Crawford, Precinct's Deputy Chief Executive, and Richard Hilder, Precinct's Chief Financial Officer. The program for today's call is outlined on page two of the presentation. I will shortly provide an overview of the highlights of the result before touching on some major themes in reviewing Precinct's progress relative to our strategy. I'll hand over to Richard, who will cover off the financial result before George provides an overview of our capital partnerships, our markets, and our operational performance. Following that, I'll provide an overview of our development progress and offer some concluding comments. As usual, we will be delighted to answer any of your questions on the conclusion of the call. Moving to the highlights page.
We are very pleased with the leasing progress made in the first six months of the year, with a significant amount of leasing achieved, offering considerable rental growth. This, alongside our operating activities, has underpinned our operating result with our AFFO improved to NZD 0.0342 per share from NZD 0.0331 per share this time last year. Our balance sheet strength has further improved, with gearing now on a pro forma basis positioned at 30%. From a development perspective, we have commenced with two new developments in the period, one at Molesworth Street in Wellington, and the second, the final stage of Wynyard Quarter Stage 3, which will see the completion of this development. We have advanced our capital partnership program and also entered the multi-unit residential market, which George will talk about shortly. It's been an incredibly active six months.
Turning to page four and an overview of our strategy. We've advanced all aspects of our strategy in the period, capital partnerships extended and new developments sourced. We've also made significant steps to ensure that Precinct retains its key talent and leverages the lessons learned over the past 10 years. The uplift in our contracted rents following new leasing has been considerable and represents the demand for our buildings and the strength in the premium office market. New leasing spreads of close to 17% is a clear indication of the benefit of owning premium office. Importantly, our commitment to lead the New Zealand market from a sustainability perspective is further evidenced by our latest GRESB score and our commitment to Green Building Council's net zero carbon commitment. Rich will talk more about this shortly.
In addition to new development starts at Molesworth Street and Wynyard Quarter, we're also very pleased to have completed 40 Bowen Street on time and below budget, as well as be selected as the preferred partner for the downtown car park development in Auckland. Page 6 sets out a summary of the key themes which we are observing in our markets. The occupier market for premium grade space continues to perform well, with material rental growth and growing demand. There are no signs yet of any reduction in demand for these assets. Importantly, since Christmas, just this year, we have seen a material reversion back to more normalized working patterns with physical occupation in our buildings north of 90%, indicating the importance of the office for businesses.
The construction market was showing signs of some relief late last year as contractors and subcontractors started to show signs of eagerness for new projects. However, the weather events of the last six weeks have further impacted the sector, with significant pressure now being further placed on the building industry. Unfortunately, there does remain significant pressure with continued labor shortages and increased pressure on materials. The rising interest rate environment is undoubtedly placing pressure on return requirements and is expected to lead to expanding cap rates. Fortunately, with the growth being generated from new leasing transactions, we believe that rental growth will enact, in part, as a mitigant to expanding cap rates, which will see valuations decline at a much more modest level. As expressed already, our view is that premium-grade real estate will materially outperform during this phase of the cycle.
Finally, the opportunity to partner with direct investors on our assets and on our projects is exciting and allows Precinct the opportunity to participate in a wider set of opportunities. As outlined already, we expect to further advance our partnership with GIC and grow our new partnership with PAG. We are also pleased to commence participation in the residential market and are delighted with the entry into a joint venture with Tim and Andrew Lamont of Lamont & Co. I'd now like to hand over to Rich to take you through the financial result.
Thank you, good morning, everyone. Total comprehensive income after tax for the half was NZD 0.6 million. This was down on the comparable period, primarily due to the non-operating revaluation loss on investment properties. Overall, the operating result for six months was strong, with improvement seen across the business.
Operating income before income tax rose 12.7% to NZD 51.3 million. A key contributor to this was the normalization of earnings following a period of sustained disruption relating to COVID lockdowns. Following the establishment of the new investment partnership, Precinct for the first time is recording management fee income and associated cornerstone income as it relates to Precinct's ownership. Turning to the next slide. Net property income increased to NZD 5.5 million to NZD 66.6 million, due primarily to the level of COVID support provided in the comparable period. The highlight for the six months was the strong performance of our operating businesses. Generator's financial performance, measured by EBITDA, was NZD 2.1 million higher than the comparable period. This material improvement reflected the return of the events business and a loyal membership base.
Generator and CBHL's performance, combined with more active income streams, helped lift operating income by NZD 10.7 million. The next slide provides a breakdown on our key performance measure, AFFO. Both funds from operations and adjusted funds from operations were higher. FFO grew by 11%, while AFFO grew slightly less by around 6% to NZD 0.0342 per share. This growth reflects new active income streams, a positive tax expense, and the reversal of foregone rental relating to COVID support. The first half dividend of NZD 0.0335 a share reflected an AFFO payout ratio of 98%, and we remain confident of achieving a minimum AFFO of NZD 0.067 a share for FY23. Turning to the next slides.
Consistent with policy, an internal review of the 2022 property valuations was undertaken at the half to determine whether there was a material value movement in the period. Considering key inputs, particularly cap rates and market rents, Defence House and Commercial Bay Retail were identified as requiring external valuations. The balance of the portfolio benefited from strong market rental growth, which partially offset cap rate expansion and resulted in no material value movement. The NZD 53.6 million devaluation resulted in Precinct's NTA per share at balance date decreasing to NZD 1.50. Turning to the next slide. Significant business activity has led to further balance sheet repositioning. During the period, we disposed NZD 275 million of assets with the proceeds used to repay bank debt.
These sales, combined with the contracts due to settle over the coming six months, will see pro forma December 31 gearing reduced to around 30%. Overall, Precinct is in a strong liquidity position with around NZD 1.5 billion of total committed funding. Following settlement of these transactions, our weighting to bank debt will significantly reduce and the weighted average term to expiry of our facilities will increase. Our weighted average interest rate is currently 4.9%, with hedging levels around 60%. The degearing that will occur during the second half of FY23 will see our hedging levels increase to around 75% until the end of FY25. Turning to slide 13. We continue to perform well in relation to our core ESG measures and have achieved another strong GRESB and public disclosure score.
We have recently signed up to the net zero carbon commitment, which has seen Precinct commit to more aspirational emissions targets. This commitment will see Precinct reduce all operational and embodied carbon emissions within the portfolio by 2030 and advocate for all buildings to be net zero carbon by 2050. Our focus for the coming 12 months is on better understanding our climate risks, including potential financial costs to provide best practice disclosure. In addition, as we turn our attention to future development, we are focused on social initiatives and improvement in our supply chain. Thank you. I will now hand over to George.
Thanks, Richard. Good morning, all. Turning to our markets. We continue to have favorable office market conditions, while the city center retail market is enjoying the long-awaited boost from the return of international tourists. Across both Auckland and Wellington, office leasing demand for prime space has continued to be strong, resulting in low levels of vacancy and strong rental growth. This is reflected in our own portfolio, which I'll talk to shortly. Looking more closely at the Auckland office market on page 16, the two-tier market is continuing with very low vacancy for prime and waterfront buildings. This is translating into strong rental growth, with on average, the market recording a 2.8% increase for the half year. On page 17, similarly, the Wellington occupier market continues to be very strong across the board, with prime vacancy sitting around 1%.
Solid market rental growth is also occurring in Wellington, with a 2% average increase recorded for the half year. Turning to operations. In summary, we're seeing a return to a high level of physical occupancy in our portfolio, with our buildings typically in a range of 80%-100% of the occupancy levels seen pre-COVID. While there's considerable variability between businesses and their pattern of office use, the overwhelming theme is that almost all businesses see real benefit in having their people come to the office, even if it isn't every day. The strong recovery in our Generator business is proof of this, as businesses are not tied in by long lease terms, yet are choosing to pay for office premises. Pleasingly, this strong recovery has returned Generator to profitability for the half year.
Moving to page 20, we can report the strongest rental growth in our portfolio that we've seen in the last 15 years. On average, our re-leasing spreads on 8,100 square meters of new leases have been 16.9% higher than the previous contract, which equates to a compound annual growth rate of around 6.6%. Market rent reviews have been a similar story, delivering growth of 9.6% on previous rents. This not only reflects the strength of market rental growth, but is also a strong endorsement of the quality of Precinct's portfolio, with our levels of rental growth significantly exceeding the market. Moving to page 21. Overall, our portfolio remains in very good shape with a manageable lease expiry profile, a weighted average lease term of 6.2 years, and occupancy of 98%.
Across the next 12 months, we have around 16% of the portfolio due for market rent review, as well as around 6% expiring. With our portfolio now assessed at 10% under rented, these reviews and expiries provide further opportunity to secure growth in rental income. Moving through to the next section, we've made significant progress on our strategy in the last year with our partnerships now approaching NZD 1 billion. Investors are interested to partner with us because of the quality of our assets and the pipeline of opportunities. We believe that this strategy will be an important lever for us to continue to improve our return on equity in the coming years. Finally, we were pleased to announce recently that we've established a residential development platform with experienced Auckland developers, Tim and Andrew Lamont.
This platform is a joint venture which will originate and manage multi-unit residential developments. Initially, this will be Lamont & Co. Current pipeline of 225 units across four projects, with current projects being funded by third-party investors. Looking forward, Precinct sees the current market as an ideal entry point to establish a pipeline of residential opportunities in a market sector where there has not traditionally been institutional capital participation. Thank you, and I'll now hand back to Scott.
Thanks, George. Turning to page 26. The current committed development pipeline consists of six developments, including 44 Bowen Street, Willis Lane, Bowen House, Deloitte Centre in Auckland, and Wynyard Quarter Stage 3, and now Molesworth Street in Wellington. Combined, these developments total around 93,000 square meters of space, which is 87% pre-leased, offering a blended yield on cost of 5.7. The total pipeline under construction is now NZD 1.1 billion in cost. This excludes the downtown car park opportunity. Bowen Campus Stage 2 on page 27 has progressed very well. 40 Bowen Street successfully completed in the period, while 44 Bowen Street is set to complete midway through 2023. Pleasingly, this development has been forward sold to the PAG Investment Partnership, which is due to settle on completion of the works. The project continues to be successful with LT McGuinness advancing works.
On completion, Bowen Campus Stage 2 will be 98% leased and offer a 12-year weighted average lease term. Page 28 sets out further detail on 61 Molesworth Street in Wellington. In the period, Precinct has worked extensively with the vendor for this site, which has enabled the commitment by the Ministry of Foreign Affairs and Trade to lease all of the office space within this project on an average lease term of 21 years. We are targeting completion of the works in 2025. LT McGuinness are now underway on-site with enabling works. Turning to the Deloitte Centre on page 29. This project has further advanced in the period, with construction progress clearly evidenced as the facade has been progressively installed. Recent weather events have impacted on the potential completion dates. We are currently working with LT McGuinness to finalize these dates.
Pleasingly, all hospitality venues within the project have now been committed, and we remain very optimistic about the level 4 and 5 office leasing suites, which are now under construction. Precinct is also working alongside IHG as we build the team to operate the hotel and look forward to opening this new 5-star hotel later this year. Wynyard Quarter Stage 3 is now materially advancing from a leasing perspective, with engineering firm, Beca, committing to 14,000 square meters in the period. This has triggered the final stage of the development, with 117 Pakenham Street now committed to. In total, the final stage now consists of over 20,000 square meters of office space, which is 65% pre-leased and set for completion in 2025.
As announced late last year, this project has now been sold into the PIP Fund with GIC, settlement is due for completion in March. Importantly, Hawkins continue to advance works on-site, with all basement excavation works now complete and steel erection underway. A summary of the remainder of our developments is set out on page 31. Bowen House continues to advance with an expectation that this project will become income-producing from June this year. Willis Lane is now well advanced, with leasing progressed and works completed to an advanced stage. We remain on track to open this center midway through 2023. Finally, the Freyberg Building in Wellington remains as an uncommitted development within the portfolio. We have advanced an office design and are now also considering the feasibility of a residential conversion given the strength of the relative markets in Wellington. Lastly, some concluding comments.
It's been an incredibly busy six months with progress across all fronts. Our core portfolio remains in very good shape with occupancy maintained at 98% and rental growth becoming even more evident. Leasing spreads are as positive as we have ever seen them, and we remain firm in our view that the role of premium office has further strengthened in the last six months. Our capital partnership program has advanced significantly in the period with the addition of PAG and the growth in our partnership with GIC. Most pleasingly, we have now entered the multi-unit residential market with our joint venture partners at Lamont & Co. This is a very exciting venture for Precinct, and we believe that our timing into this market is optimal. While there remains much uncertainty from a macroeconomic perspective, we remain optimistic about our position and the markets that we're operating in.
That brings us to the end of our presentation, and we are more than happy to take questions. I'll hand back to you, Ashley.
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 two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Bianca Fledderus with UBS. Please go ahead.
Hi, good morning. First of all, just on your gearing levels. Yeah, pleasing to see that it's at 30% at the moment. Just wondering, where do you see your optimal gearing through the cycle?
Yeah, we don't tend to have a target gearing. Generally, we have an FRM financial risk management policy below 37.5%. I think given where we are, the cycle probably low thirties.
Okay. Thank you. Just on your guidance for the full year, dividend guidance unchanged. Could you provide some color around what you're assuming for interest in tax for the full year?
The tax expense was, as you know-noted, it was positive for the first half, so quite strong. I think that will revert somewhat in the second half, so it won't be as strong. Interest costs will be slightly higher, for the second half, just given floating rates.
Okay. Thank you. Just last question, just around the downtown car park. Do you have any sort of update on that at this stage with regards to the timeline for that, or is it, yes, still just pretty early stages, obviously?
Yeah, look, there's no update that we can provide. We are the preferred developer, and we're in negotiations to conclude an agreement, but can't give any further update at this point.
Okay. All right, great. Thanks for that. That's all from me.
Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Rohan Koreman-Smit with Forsyth Barr. Please go ahead.
Hi, guys. Congratulations on a very solid first half. Just a couple, hopefully quick ones from me. You know, that re-leasing spread of 17%, is there anything special in terms of those leases were particularly under rented versus the rest of the portfolio, or something else that kind of drove those really strong results?
They were a reasonable spread of deals, Rohan. I guess indicative of demand for, you know, that kinda higher quality end of the market. There were one or two of those sort of premises that were really high quality, there was a lot of demand for them, so they probably drove, you know, a slightly better outcome in terms of leasing, so good competitive tension, nothing abnormal.
Thanks. Just in terms of fees that you've earned, you know, NZD 1.6 million. Can you give us some idea of where you expect that to kinda drop through for the full year? Also maybe if there's a mix of, you know, development and kind of underlying base management fees in there.
It's kinda hard to say at this stage, Rohan. There's still a couple of variables with regards to settlement and timing. A little difficult to give guidance in that regard at this stage.
Too good. In terms of the development book, you know, you got rid of a few and then you took on another one. Are you able to give us, I guess, your view on more asset sales and kind of, you know, is the current kind of development book largely built to hold, or is there more in there that you would either look to exit early on or, you know, kind of fund through or sell down on completion?
Yeah, good question. I mean, I think for us, the way we're sort of thinking about developments now is that it's more likely that we will have partners with us to co-invest in our developments. That might see us trigger developments on a 100% basis at the outset. Sort of similar with Wynyard Quarter Stage 3, as we progress those developments and perhaps take risk out of them, our expectation is that there would be sort of partners that might come along and invest alongside us.
Perfect. Final question, just on the resi? The current JV book is all, how do I phrase that? Do you get fees on the current JV work, or is it once you start to take on new projects that you actually start to earn fees from that JV? Also, those new projects going forward, what sort of return metrics and hurdles are you targeting?
Hey, Rohan, George here. The JV earns fees on the existing book of projects. We're a participant in that JV, we will have a share of those. All of those existing projects are funded through third party investors, Precinct isn't invested in those. Going forward, we expect there to be a mix of third party investors and Precinct participation. In terms of what returns we'll be targeting, look, it's, we have our sort of development returns that we look to achieve, that we would look to achieve out of our other development exposures, it would be consistent with those, and would be driven off our, you know, our a premium to our cost of equity.
without giving you specific numbers, that's how we're looking at it.
Thanks.
There are no further questions at this time. I'll now hand back to Mr. Pritchard for closing remarks.
Great. Thanks, Ashley. look, thank you everyone for dialing in. Thanks for your support. We're really pleased with the progress that we've made in the last six months, looking forward to the second half of the year. Thanks again.
That does conclude our conference for today. Thank you for participating. You may now disconnect.