Ladies and gentlemen, thank you for standing by, and welcome to the Precinct Properties Half Year Results 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Mr. Scott Pritchard. Thank you. Please go ahead.
Thanks, Christian, and good morning, everybody, and welcome to the 2020 interim result briefing for Precinct Properties. I'm Scott Pritchard, and I'm the Chief Executive for Precinct, and I'm joined today by George Crawford, Precinct's Chief Operating Officer, and Richard Hilder, Precinct's Chief Financial Officer. The first half of the 2020 financial year has been a busy period. We have completed the second building at Bowen Campus on time and on budget. We've maintained portfolio occupancy at 99%, and we have advanced our development projects, both in regards to construction milestones and leasing activity.
Each of these items have had an impact on Precinct's operating and financial performance, and we're pleased to be here today to provide an overview of the company's position. 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 reviewing our progress against our own three strategic pillars. I'll then hand over to Richard, who will take us through the interim results and capital management position for Precinct.
George will summarize the property markets and our portfolio performance. I'll then provide an update on our development activities and finish with some concluding comments. Upon completion of the presentation, we will be happy to answer any questions that you might have. Moving to the highlights page. Aside from a range of positive results for the first half, the most pleasing outcome has been the continued strength of our markets and the performance of our portfolio.
On a like-for-like basis, we have recorded a 7.5% lift in net property income following strong leasing outcomes which have provided significant growth over passing rents. This has led to our AFFO growing by 6.8% in the first half compared to the previous corresponding period. This gives us great confidence to reconfirm our dividend guidance for the year of NZD 0.063 per share, resulting in a 5% lift over 2019. We have refinanced our NZD 150 million bank facility, which was due to expire in November this year.
Our balance sheet will be strengthened following the sale of Pastoral House for NZD 77 million, once it goes unconditional at the end of this month. Current gearing now sits at 25% and will reduce to 23% following the sale. At an operating level, we have maintained our occupancy at 99% and have an extended weighted average lease term of 8.7 years. This follows leasing transactions, which have provided an average increase of 9.2% over passing rents.
Finally, we are pleased to announce today the expansion of the Generator business into the Wellington market, following the acquisition of a dedicated heritage building in the central city of Wellington. This follows a period of real strength for this business, with an average 95% occupancy secured in the period. George will discuss this in more detail shortly. Turning to page four. Precinct's well-defined strategy remains unchanged, which is summarized into three distinct aspects, including operational excellence, developing the future, and empowering people.
Our portfolio continues to attract good demand from occupiers with 99% occupancy and strong growth in rental levels. We have improved our global real estate sustainability benchmark score from 69 to 77 and have surpassed the global average of 72. The GRESB benchmark is the most comprehensive sustainability measure globally, and it is here that we are focused on measuring and improving our sustainability performance. We are also focused on reducing our carbon footprint and are working towards a comprehensive approach to managing our emissions.
In terms of development, we are delighted with the progress at Commercial Bay, both in regards to construction and leasing. We have maintained our program to completion and remain on track to open the retail in late March and the office during April. Once Commercial Bay is complete, it will trigger a sequence of events which will result in the balance of our Auckland portfolio being largely occupied and provide one Queen Street on a vacant possession basis to enable construction works to commence. Works at Wynyard Quarter continue to advance, and we are pleased to have committed the remainder of the office space.
Finally, the successful completion of Defence House in Wellington has resulted in the net development being fully completed with 100% occupancy and enhanced returns. Finally, empowering people. We are delighted to have been awarded Rainbow Tick certification, demonstrating our commitment to maintaining a high-performing, inclusive, and supportive culture, which supports diversity of thought and promotes equality. I'd now like to ask Richard to take you through the financial results.
Thanks, Scott. Good morning, everyone. As Scott has already mentioned, we had a strong first half with total comprehensive income after tax of NZD 53.6 million. This compares with NZD 25.5 million for the same period last year. The main differences relate to higher operating income, liquidated damages, and the movement in financial instruments. Net operating income after tax was NZD 60.5 million, or around NZD 0.046 per share. Adjusting for liquidated damages, net operating income was NZD 41.3 million, which was around 9% higher than the comparable period.
Importantly, Generator's operating performance continues to improve. The business contributed NZD 1.2 million to Precinct's net operating profit. AFFO was around NZD 0.031 per share, 7% higher than the comparable period. The calculation of AFFO included in the appendix shows a deduction for liquidated damages revenue. This will be retained to offset costs of delay relating to Commercial Bay. Dividends for the first half totaled NZD 0.0315 per share, reflecting an annual increase of 5%. Full year guidance remains unchanged at NZD 0.063 per share.
An internal review of the June 2019 property valuations has been undertaken. Despite a favorable valuation environment, including some market rental growth and cap rate compression, there was no material value movement against book cost as at 31 December. Turning to Slide seven. Overall, net property income was NZD 2 million, or 4% higher. The completion of Bowen Campus helped increase net property income by NZD 5 million.
However, this increase was offset by the 50% sale of the ANZ Centre and forego ne income associated with the development works at Pastoral House and number 1 The Terrace. After allowing for developments and transactions, net property income on a like-for-like basis was 7.5% higher. Both Auckland and Wellington had good growth, with net property income increasing by 9% and 5%, respectively. In Wellington, net property income was higher due to the top floors of the Aon Centre being income producing following development works in 2018. In Auckland, high net property income related mostly to the AMP Centre, where major leasing rent reviews and development activity have occurred in recent years.
Turning to the next slide. As you will see in our financial statements, there have been several changes since June. We have a wholly owned Generator since February 2019, and this is the first six-month period where the business has been fully consolidated. As noted, Generator continues to meet expectations, contributing NZD 4.8 million to operating income before indirect expenses. The biggest impact to our interim accounts has been the adoption of IFRS 16. IFRS 16 requires lessees to recognize leases on balance sheet and replaces rent expense with lease depreciation and interest expense.
Generator's leases fall under the standard, which has impacted our financial results. This is detailed as an appendix and summarized in the table. On our balance sheet, a right of use asset and lease liability, both totaling NZD 46 million, have been created. Eliminating the rent expense has increased operating income, while the introduction of lease interest and depreciation has reduced net profit after tax by NZD 1.2 million. Precinct will continue to calculate adjusted funds from operations and operating income on a pre-IFRS 16 basis. We believe this will provide a more accurate measure of operating performance.
Finally, in the period, we have recognized NZD 50 million of liquidated damages, as these have been assessed as being virtually certain. These have been allocated to capital and revenue, compensating Precinct for costs of delay. Finally, on capital management. During the six months, we settled the NZD 163 million USPP. We have now successfully diversified our funding, with around half of our funding coming from non-bank sources. Post-balance date, we refinanced the NZD 150 million bank debt facility, which was due to expire in November 2020.
Total committed funding remains around NZD 1.2 billion, with the new five-year facility increasing the weighted average term to expiry to 4.4 years. The balance sheet remains in a strong position with gearing of 25%. We continue to have sufficient capacity to deliver all committed developments. The conditional sale of Pastoral House for NZD 77 million will reduce gearing and help fund future opportunities. Our weighted average interest cost has reduced to 5.1%, with hedging currently sitting around 80%. I would like to hand over to George. Cheers.
Thanks, Richard. On page 11, the markets we invest in continue to benefit from strong city center investment and growth in population, but each market is also being influenced by its own unique drivers. The flexible space part of the office market continues to grow as it is increasingly understood and accepted across a range of occupiers of differing sizes. We anticipate further development and differentiation in this market, particularly amongst larger businesses using this type of space. There will be new supply added to this segment in Auckland over the next couple of years, and while we expect that this will be met with good demand, it will also limit the extent of pricing growth.
In terms of city center retail, we continue to see strong demand for well-located space, which is still in short supply. This is evidenced by the impressive list of retailers we have managed to attract to Commercial Bay, which Scott will speak to shortly. The trading backdrop for retailers is clearly challenging. This is impacting on affordability of rents and will limit retail rental growth.
The Auckland hotel market is expected to be impacted by the combination of new supply starting to come online and the further delays to the convention center following the unfortunate fire last year. This is likely to be further impacted by disruption to travel patterns due to the COVID-19 outbreak. Both of these impacts should be relatively short-term and, in our view, do not detract from the strong long-term fundamentals in the Auckland hotel market.
Auckland city center will continue to be an attractive place to visit, and the city center as a tourist destination will be further improved by the huge public realm investment underway currently by Auckland Council in preparation for the America's Cup, as well as by private developments like Commercial Bay and the Convention Centre. Moving to page 12, the Auckland office market remains in very good shape with a shortage of available space and solid demand. While the average net effective market rental growth is indicated at just 1.1% for the last six months for Auckland, our own portfolio continues to deliver stronger growth than this, with annualized growth indicated by new leasing and rent reviews that we've completed of greater than 3%.
The confirmed outlook for new supply beyond our own developments continues to be light. However, there are one or two new city center developments being talked about which have the potential to materialize beyond 2023. The Wellington market also continues to perform well. There is solid demand from both public and private sector and very low vacancy rates. These strong market dynamics, combined with the market insisting on seismically strong buildings, is seeing new Wellington benchmark rental levels being set in order to pre-commit new buildings. As Scott will touch on, this will benefit us as we seek to get underway with Stage 2 of Bowen Campus.
Moving to page 13, our investment portfolio remains in strong shape with both portfolios virtually full. Across both Wellington and Auckland, we are seeing our portfolio deliver solid rental growth, with net effective rentals achieved across our leasing in the six months, on average 9.2% higher than on previous contracts. On page 14, it's been another strong six months for leasing, with over 17,000 sq m completed in the period across the portfolio. Highlights have included five new leasing transactions at Commercial Bay, taking it to 92% leased, and new commitments at Wynyard Quarter to conclude the leasing of Stage 2.
Within our Auckland portfolio, we are seeing particular strength in the AMP Centre and Zurich House. We expect this will continue to be the case as Commercial Bay completes. The rents within these assets remain relatively affordable and we believe will offer the opportunity for continued rental growth. The benefit of these rental uplifts as well as improved occupancy is now coming through purely with an uplift of NZD 1.4 million in net property income for the period for AMP Centre.
Of particular interest has been the impact of technology businesses on demand. 40% of our new leasing or over 5,000 sq m has come from technology businesses in the period across a range of tenancy sizes. This is an interesting trend and one that we believe will continue to positively influence our market. As these types of businesses become more important in the share of the employment market, they're increasingly appreciating the benefits of being located in high-quality buildings in the city center. We are continuing to reinvest into our assets to ensure that we provide a level of amenity and service at the very best in the market.
Consistent with this strategy, we are underway with creating a brand-new lobby and meeting suite at the current PwC Tower at 188 Quay Street. We believe that 188 Quay Street remains one of the most desirable and sought-after buildings in the market, and this reinvestment to create a new level of amenity will ensure that it stays that way. We have also recently completed new end-of-trip facilities at 188 Quay Street and at the AMP Centre, which are best in class for these assets.
Moving to page 16. A year ago, we announced a move to 100% ownership of Generator, with a target to get to annualized revenue of around NZD 20 million and an EBIT target of 10%-15% of revenue. We are pleased to report that these targets have been achieved and that the business is in good shape to grow in a way which is supportive of and aligned with Precinct's strategy. The opportunities for growth through Precinct clients' use of Generator spaces, as well as Generator members growing into Precinct buildings, have started to be realized in the last six months. Greater opportunities exist in this area going forward.
Almost all major leasing RFPs in the market now seek a flexible space element as part of the response. Our unique position in the market as both a landlord and operator of shared space gives us a competitive advantage. We will shortly be opening the new meeting and event suites at Commercial Bay. We are also building a meeting suite as part of the 188 Quay Street lobby redevelopment. Both of these will be managed by Generator as we build a network of meeting and event spaces throughout the city for both Precinct clients and Generator members.
Moving to page 17. We are pleased to advise that we will be launching Generator in Wellington next year. Precinct has acquired the Dunbar Sloane Building, which has a really central Wellington location on Waring Taylor Street next to our Central on Midland Park building. This building will be strengthened to 100% of NBS as part of a comprehensive redevelopment and will provide a full Generator offer. We're confident that there will be strong demand for Generator services in Wellington. This reflects feedback from our Auckland members as well as from the local Wellington market.
We have had strong market feedback indicating demand for this amenity as part of the leasing inquiry we've received whilst marketing the second stage of Bowen Campus. This has come from occupiers with an interest in core leases alongside desks and Generator. As a consequence, we are also exploring the opportunity to include a Generator facility as part of our planned Bowen Stage 2 development. Thank you. I'll now hand over to Scott to take us through the balance of the presentation.
Thanks, George, turning to page 19. The current committed development pipeline consists of three developments comprising Commercial Bay, Wynyard Quarter Stage 2, and One Queen Street. Combined, these developments total around NZD 1 billion in capital spend and provide the business with a blended profit on cost of over 30% and a blended yield on cost above 7%. These developments are now 88% pre-committed as at balance date, with a weighting to Auckland of 100%. In total, these developments will provide Precinct with close to NZD 400 million in development profits.
The next stage of our development pipeline consists of Bowen Campus Stage 2 and Wynyard Quarter Stages 3 and 4, with anticipated returns of a 15% profit and 6.5% yield on cost. Most notably, as we advance our developments and successfully complete each project, we are enhancing the business and reducing the risk that the business carries. This is evident in the chart on the right-hand side, highlighting that our total development exposure will shortly be the lowest it has been for over five years.
Now moving to Commercial Bay on page 20. Pleasingly, we remain on track to complete the project in March and April this year. We are working very closely with our main contractor and can confirm that the retail center will open in late March, and we expect to open the new PwC Tower during April. We have maintained our investment returns for the project and are delighted with the leasing progress made on-site, which I will talk about in more detail shortly.
As outlined in our release today, we have also recognized a further NZD 15 million in liquidated damages above the NZD 2 million recognized in June 2019. This reflects that Fletcher and Precinct have resolved all claims and counterclaims and are focused on completing the project on time and with a quality finish. We are excited about opening the retail center to Aucklanders and welcoming our clients into the new PwC Tower.
Retail leasing has progressed in the period, and we are thrilled to be able to announce that the center is now fully leased. The mix and quality of retailers is outstanding, and we believe we have collected a highly complementary and unique set of retailers that will bring something very new and exciting to the city center. The weighted average lease term for the retail center is 7.3 years, and the leasing secure has been consistent with our original feasibility.
The office leasing has also increased in the period. Our target at the commencement of the project was to secure 90% commitments by the time we completed the tower. Today, we are thrilled to announce that the tower is now 92% leased following a series of leasing transactions completed in the last six months. This leaves just one full floor and two half floors left to lease. The tower has a weighted average lease term of 11.8 years, and the leasing has been completed in line with our original feasibility.
Turning to page 23, where we provide an update on One Queen Street. This project will commence once we are able to migrate the current occupiers from the building, which will commence following the completion of Commercial Bay. We are carefully considering putting Generator into the final three office floors in this building, offering both flex space and event space. This follows the continued strength and performance of the Generator business, particularly the demand for our Britomart site.
Moving to Wynyard Quarter Stage 2. Progress on-site continues to advance very well. We remain ahead of program and on budget, with Hawkins as main contractor continuing to perform very well. We have now committed all of the office space and are commencing our leasing on the food and beverage space now. Pleasingly, we remain on track to achieve our return metrics with a yield on cost of 7% and a return on cost of 15%. Now moving to our future developments.
Bowen Campus Stage 2 presents as our most immediate development opportunity. We have progressed design to a point where the design is now complete, which gives us a good level of confidence and clarity to secure good construction pricing. We are advancing negotiations with a range of occupiers and hope to pre-commit the development in the near future. Our expectation at this stage is to build both buildings at the same time, although we do have the option to stage the construction one building at a time. The final stages of Wynyard Quarter are set out on page 27.
Between the two buildings, we can provide a further 19,000 sq m of office space. Our expectation is that we will commence these two buildings in 2 separate stages. We hope to commence with the third stage later this year. Given the success of Wynyard Quarter Stage 2, we feel confident about progressing with the first stage of Wynyard Quarter. Lastly, some concluding comments.
Precinct has had the benefit of a very clear strategy for the past eight years. This has given the team clarity about where we focus and how we take advantage of the markets we are operating in. Our developments are creating world-class real estate and providing outstanding returns. These returns are now providing an AFFO growth profile, which will underpin dividend growth, evidenced by the lift in dividend by 5% this year.
While the global outlook remains uncertain, the New Zealand economy, and in particular our markets, continue to perform well. Interest rates are set to remain low for an extended period of time, while activity levels, particularly in Auckland and Wellington, remain elevated. This places Precinct in a really strong position, and we feel very excited about our future. That brings us to the end of our presentation, and we're very happy to take any questions which you may have.
Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question today, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request at any time, please press the pound or hash key. Your first question today comes from the line of Nick Mar from Macquarie. Please go ahead.
Morning, guys. Could you just talk through the earnings a little bit more in terms of the distributable profit? You've obviously included either all of it or none of it in the AFFO number and just trying to reconcile that back to the NZD 0.068 that you'd previously guided to?
Sure, Nick. The NZD 0.068 don't include an assumption of liquidated damages revenue coming through. The NZD 26 million will go into that net operating for the full year earnings guidance. In terms of our AFFO, we've taken that number out, you'll see in the appendix there, with the intent to retain that to essentially offset the cost of delay in relation to capitalized interest.
The number that you've got, is that essentially the final number and it'll be spread across the remaining period to cover liquidated damages? Or is there more to come?
Are there more liquidated damages to come?
Yeah.
We don't expect there to be any more liquidated damages.
Okay. If you apportion the liquidated damages for the period, do you know what the distributable profit number is for that?
I haven't done that calc. That is the liquidated damages since they came into effect from essentially the original contract date for the retail and also the office.
Yeah, it sounds like you've included essentially the second half ones and the first half because you've received them today. Is that correct?
We've recognized them all on one line as at 31 December, as when they become virtually certain. We can't choose when we can recognize them, essentially. It's when they become certain to Precinct.
Nick, because at June last year, there were a bunch of claims and counterclaims still outstanding, it was very hard to make a determination of what was virtually certain, hence there was only NZD 2 million recognized at balance date last year.
Just to be clear, Nick, the AFFO excludes the LDs.
Yeah. No, that's fine. It's just trying to work back towards a portion of the 6.8 is quite difficult for the half.
Yeah.
Yeah. No, that's cool. In terms of the portfolio, given the increase on passing that you've seen on market and new leasing, where do you think the under-renting sits in the portfolio, appreciating you haven't gone through a full valuation of the half?
Yeah. Across the portfolio, if we compared with last 30 June rents, we were 5% under rented across the portfolio, split between four for Auckland and 6% for Wellington. As to where we would sit today, we would expect that that level of under-renting has probably increased by another 1%-2% based on what we're achieving in our leasing currently.
Okay. No, that's clear. Then in terms of Generator, what kind of return metrics would you put on the new building that you're purchasing and spending NZD 25 million on in total? How do you look at that from a return on cost perspective, I guess both from a Precinct and then Generator perspective?
Yeah. We look at it both as stacking up as a development in its own right, and then making sure that the Generator portion has a return which you'd expect for that business activity. When we look at it overall, as you said, just over NZD 25 million of total project cost. The Generator portion of that would work out at about NZD 2,500 a sq m. In terms of a blended yield on cost that we'd expect to get out of it overall, we would be looking for that to be north of 9%.
Yep, that's clear. Lastly, just on the vals. You obviously didn't do a full val this time. How come there wasn't any release of profit and risk from Commercial Bay over the half year, given leasing and movement in terms of times completion?
We do that within the internal valuation exercise. We do assess the profit and risk within that process. That goes into the calculation and judgment of whether there has been a material movement.
Yeah, okay. You put that into a blended 5% threshold instead of just booking that, because that's, I guess, more certain than anything else, really.
Yeah.
Okay. No, that's fine. Thanks a lot.
Thanks, Nick.
Your next question comes from the line of Owen Batchelor from Jarden Securities. Please go ahead.
Morning, guys.
Hello .
Just a question on the terms agreed for around half the space at Bowen Campus Stage 2. Is that to new tenants to the portfolio or existing ones?
All right, George- t hat is to new occupiers to the portfolio.
Okay, great. Thanks. On Wynyard Quarter Stage 3 and 4, can you just remind me what the sort of target pre-commitment is there before you risk on those?
Look, we've been pretty encouraged by Wynyard Quarter Stage 2, which we kicked off with no pre-commitment at all. We are open to commencing on Stage 3 or 4 down the track, with little or no pre-commitment, given the strength of the Auckland market. At the moment, looking through the expiry profile of the type of occupiers that we're looking at, we think there's a pretty good opportunity for delivery in 2022 and 2023 to meet that demand, and certainly getting pretty good levels of inquiry.
Okay, great. Thanks. Just my last one, just on the sale of Pastoral House. It's still conditional and still being syndicated out at present. Can you just talk to the reasons why it's still conditional from your point of view? Is it that if the required equity isn't raised prior to the closing date, the sale will fall over, or is there some sort of underwriting in place for that deal?
No. Exactly what you said. Subject to them raising the equity. We were quite comfortable taking that risk given the strength of the market and syndications. We're pretty confident that they will be able to raise the equity required. That raising closes in the next couple of weeks.
Yep. Just to confirm, if they only raise 75% of equity, that building will go back to you guys?
Yeah. If they don't meet the threshold, then yeah, the transaction won't proceed.
Okay, cool. Thanks. That's all from me.
Thanks, Owen.
Thanks.
Your next question comes from the line of Jeremy Kincaid from UBS. Please go ahead.
Morning, guys. Just one question from me. Could you give an indication of where you expect committed gearing to go following all of these developments in the future, and also whether or not that number includes an assumption of assets that need to be sold?
Yeah. Committed gearing is around 33%, so that's got everything- Commercial Bay, HSBC, Wynyard, including the Dunbar amount as well. Pastoral sale will bring that down, so that doesn't include Pastoral. Pastoral will bring it down from there, based on the NZD 77 million, so roughly 32%. So that helped.
Yep. I bet it doesn't include Bowen Campus Stage 2?
No, that doesn't include Bowen Campus Stage 2- i f you included Bowen Stage 2 in the Pastoral sale, you'd probably be around mid-30s.
Okay, great. Thank you, Jeremy.
Your next question comes from the line of Adam Lilley from Craigs Investment Partners. Please go ahead.
Hey, good morning, guys. Just a quick one in terms of backfill leasing for the remaining spaces at ANZ and the old PwC. If you could just give a bit of an update on how that's progressing?
In terms of PwC Building, the available space within this building is almost 100% leased. In terms of ANZ Centre, we've completed one leasing transaction there. We have active interest over a further two floors. Basically, our main area of backfill vacancy remaining is that ANZ Centre.
Do you give kind of a feeling as to how close you are to terms on that remaining space?
On those two floors, that there's under negotiation at present. That's well advanced. In terms of the remaining space, there is interest in that space. There isn't a lot of vacancy in the market. We're confident around leasing the balance of ANZ Centre.
Okay, very good. Just otherwise, in terms of other disposals in the portfolio, is there anything else over and above the Pastoral s ale, is there anything you're contemplating in the short to medium term?
Look, we're always open to a good offer, Adam, but we're not actively undertaking any campaigns at the moment.
Okay. That's all from me, guys. Thanks.
Thank you.
Your next question comes from the line of Shane Solly from Harbour Asset Management. Please go ahead.
Good morning, guys. Thank you for the rundown. A couple of quick questions from me. Firstly, on Generator, can you just talk about at what point does it make a positive earnings per unit contribution? Great to see a good uplift in returns there.
Yes, Shane. It's making a positive contribution now. It's contributed NZD 1.2 million over the period. Which is, in terms of what we have invested to date in Generator, in terms of the acquisition and all capital that's gone in there, it's a total of about NZD 24 million. On an annualized basis, it's currently generating around a 10% return on that capital.
Okay, thank you. Plenty of growth here still. You've obviously committed to quite a meaningful step up there. You're keen to keep growing this business?
Yeah, look, we think that the market is demanding it. We think our position of being a landlord who also operates flexible space is quite unique in the market, and it means we can respond in a way that others can't. We think the returns are good. Within Wellington, we think that's a logical place for us to go to next. We've talked about our investment in the Dunbar Sloane building, but also considering that within Bowen Campus, that would take us to about 5,000 to 6,000 sq m in Wellington, which we think would be a good next step.
Beyond that, there is new supply and new competitors entering the market in Auckland, with WeWork's recent announcement and also spaces opening within Commercial Bay. I think that'll take a while to be absorbed. Beyond that, in the longer term, Generator having a presence in the Commercial Bay precinct would also make sense for further growth.
Okay. Thank you. My next question is on sustainability. Is there a plan to target a carbon neutral portfolio at any stage?
Hey, Shane, it's Rich here. Yes. We're in the process of getting our carbon certified, and we are accruing for the offset of that. We do intend on going to a carbon zero from an offsetting perspective. I think the next stage for us after that will be then how do we start to reduce our carbon footprint rather than just offsetting. Yeah, we are looking at that.
Okay. One question, just where do you think- where's the cap rate cycle likely to trend from here?
Look, I think, to be honest, post-Christmas, the sentiment is towards further compression. That's the sense we're getting from the market generally. It's a bit of an estimate at this stage, but my sense would be that we'll see more compression rather than expansion.
Okay. Thanks, guys.
Thanks, Shane.
Thank you.
Your next question comes from the line of Angus Simpson from ANZ. Please go ahead.
Good morning, guys.
Angus.
Just following up on Adam's question, just with the lease that's been signed in ANZ, was that over one floor? Did you announce that?
It's over most of one floor, not an entire floor.
Okay, brilliant. Just the last question from me, a little bit granular, but the rent from Commercial Bay that was reported, is that solely H&M? Can you remind me again how much space H&M is currently leasing? Are they paying any turnover rent at present?
It's about a 4,000 m store, and they're not paying any turnover rent.
That is all the rent. That is the rent in [Com Bay] .
Okay, brilliant. Thanks for that.
Your next question comes from the line of Nick Mar from Macquarie. Please go ahead.
Hey, sorry, I just wanted to follow up. Just on the pipeline. Previously, you guys had the yield on cost target of 6.5%-7%. Now it's just 6.5%. What's changed there? Secondly, the total incremental spend on Wynyard 3 and 4 has gone up by about NZD 20 million. Can you just talk through those changes?
Yeah. Thanks, Nick. Really, the pressure around the yield on cost is reflecting that construction costs have probably run ahead faster than growth in market rents. That's that kind of thematic we've been talking about for a while, where it's still challenging to be able to put these developments together. The profit on cost has been protected because we're seeing tighter caps, but the increased construction costs are having an impact on yields. We still think, though, if we can get a six and a half percent yield on cost, it's absolutely worth doing when these completed assets are sitting in the low five range.
Second question around size, or increase in CapEx. That's really a consequence of just design development on that location, and we think we're able to get slightly more GFA than what we could last time. In fact, quite a bit more GFA. We're just working that really hard at the moment. We're in the process of engaging on our land value calculation with Panuku, the revised feasibility has slightly bigger buildings, and that's what drives the extra cost.
Perfect. Thanks, guys.
Cheers.
Just a reminder, ladies and gentlemen, if you do wish to ask a question today, please press star one. Thank you. Once again, ladies and gentlemen, if you do wish to ask a question, please press star one. Thank you. There are no further questions at this time. I will now hand the conference back to today's presenters. Please continue.
Thanks, Christian. Look, I just want to thank all of you for dialing in today. We really appreciate the interest that you take in the business, should I say. As we stated during the presentation, we're really pleased with the steps that we have taken in the last six months, we're really excited about what the next six months, 12 months holds for the business. Thanks very much for your support, if you have any further questions, feel free to contact us directly. Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.