Earnings Call: H2 2018

Aug 15, 2018

Thank you for standing by, and welcome to the Precinct Properties Full Year Results 20 Conference Call. You. I would now like to hand the conference over to Mr. Scott Prichard, CEO. Thank you. Please go ahead. Thanks, Jody, and good morning, everyone, and welcome to the 2018 annual result briefing for precinct properties. I'm joined today by George Crawford, Precinct's Chief Operating Officer and Richard Hilda, Precinct's Chief Financial Officer. 2018 financial year has been another good one for the business. We have enhanced the portfolio. We've sold assets to recycle capital We've progressed our developments. We've sourced non bank debt to strengthen the balance sheet and importantly, we've grown earnings and dividends for shareholders. The program for today's call is outlined on page 2 of the presentation. I will shortly provide an overview of the highlights of the results before touching on some major themes and reviewing precense progress relative to our strategy. I'll then hand over to Richard who will cover the financial results before George provides an overview of our commitment today to our next major development, 1 Queen Street. Following that, I will provide an update on commercial Bay and Bowen campus as well as covering precinct's view of our markets before George covers in detail. Page 2 of the presentation. I will shortly provide an overview of the highlights of the results before touching on some major themes and reviewing precense progress relative to strategy. I'll then hand over to Richard who will cover the financial result before George provides an overview of our commitment today to our next major development, 1 Queen Street. Following that, I will provide an update on commercial Bay and Bowing campus as well as covering precincts view of our market before George covers in detail the performance of the investment portfolio. As usual, we'll be delighted to answer your questions conclusion business is recording a net profit after tax of $254,900,000. This significant profit has been helped by the revaluation gain of $209,000,000, which has led to our NTA per share increasing to $1.40, an increase of over 12%. Perhaps most pleasingly, we are continuing to drive meaningful growth in our operating income at the same time as transforming the portfolio into a higher quality set of assets. Our operating earnings have increased by around 2.5% with earnings per share increasing to $6.32 per share which was in line with guidance. In addition to the financial result, we have sold $191,000,000 of assets in the period with the sale of 50 percent of the ANZ Center and the disposal of 10 Brandon Street in Wellington. These sales have strengthened the balance sheet and reduced gearing to below 20%. While we're on the balance sheet, in the period, we have raised $250,000,000 of non bank debt and have post balance date refinanced to $760,000,000 debt facility. Of 99% demonstrating the strength of the occupier markets that we are in. Also today, we are excited to announce we are committing to Precinct's next major development, 1 Queen Street. This development further enhances the commercial bay area and provides a further dynamic use to this precinct bringing the waterfront to life. George will talk in more detail about One Queen Street in just a moment. Turning to page 4 major themes. Before we get into the detail of the result presentation, we thought it may be useful for us to outline what we see as the major themes which surround and influence the precinct business. Firstly, our view that city centers will continue to outperform. Underpinned by a growing resident population and a high relative contribution to New Zealand's GDP, Auckland City Center attracting more people to work, live, and play. While Wellington remains as New Zealand's capital city, precinct continues to see Auckland as New Zealand's gateway city offering significant opportunities as the city evolves to meet the demands of Greater Auckland. Secondly, working age population growth We have as a business monitored the growth and trends in working age population for a number of years and believe it provides a very good proxy future city center office demand. By our analysis, we expect continued growth in demand for city center office space in Auckland with an expected 10,000 new workers anticipated in the city centre over the next 4 to 5 years. This gives us good confidence in the occupier market in Auckland. Thirdly, the challenges that we are all seen in the construction market, which are driving considerable increases in the replacement cost of assets. We expect that this will underpin market values and importantly limit supply given the inability for feasible office development to occur expectation is that there will be insufficient supply to meet anticipated demand for the period of 2021 to 2023. And finally, activity levels in Auckland will continue to remain elevated. While we acknowledge that business confidence is lower, This inquiry for space within our portfolio is a proxy for confidence, we are continuing to see elevated inquiry for additional space. As activity levels within Auckland demand more workers and more space requirements ancillary benefits as tourism and leisure are also beneficial to precincts overall strategy. Turning to page 5, Last year, we articulated our refined strategy, which was summarized into 3 distinct pillars comprising our people, operational excellence in developing the future. This year, as outlined in more detail in our annual report, we have further progressed our strategy with a renewed focus on sustainability. This is summarized on the right hand side of the slide. In addition we have outlined here the progress made with regard to our 3 pillars. Firstly, we continue to invest heavily in our team and the culture of the business. Focusing on career advancement and job enrichment remains an ongoing area of attention. Additionally, the increased focus on growing our employee base to be more diverse is proving valuable in terms of challenging traditional thought processes. Operational excellence is being maintained with a strong portfolio performance, well considered capital management and an increasing level of Green Star rated buildings. Our development portfolio has further advanced in the period with commercial value obtaining further occupiers and advancing its construction. Bowen campus remains on program and on budget, while 1 Quin Street is now our next focus with construction set to commence in early 2020, reenergizing the existing asset, which is undoubtedly located in the best position in Auckland City. I'd now like to hand over to Richard to take you through the financial results. Thank you and good morning everyone. As noted by Scott, 2018 has been a good year for pre Act and this is reflected in the financial performance for the year. A revaluation gain of almost $209,000,000 contributed to a net profit after tax of $254,900,000. Importantly, net profit before tax for the period was up 7.4%. The completion of Winyard Stage 1 Auckland rental growth and improved Wellington occupancy resulted in net property income increasing by $900,000. Offsetting this increase was a higher tax expense for the period of $6,300,000. This expense was higher than previous guidance due to lower level of leasing fees and fewer fixtures and fittings disposed of in the period. These deductions will now likely fall in the FY19 year. The revaluation gain was partly offset by other non operating items. The fair value loss in financial instruments was largely due to a fall in the New Zealand dollar swap curve. While the deferred tax expense of $17,000,000 related to a change in the estimate for determining the provision for deferred tax consequences of a sale. The provision now better affects the net sale price allocation process that occurs at sale. Slide 8 provides a breakdown of net property income. After allowing for development activity and in foregone income at 8 House and number 1, the Terrace Podier net property income on a like for like basis was 3% higher. In Wellington, average occupancy in the period increased 4% to 98%. This improvement led to Wellington's net property income increasing by almost 3%. We continue to experience net property income growth in Auckland, This reflects underwriting in the portfolio, but also a strong occupier market and demand for quality space. As Slide 9 shows, it has been 5 years since we fully transitioned our dividend policy to a sustainable AFFO based policy. Over that time, funds from operations payout ratio has averaged 84% and we have retained around $63,000,000. These funds have been used for maintenance CapEx and leasing costs across our investment portfolio. And importantly, our AFFO payout ratio over same period has averaged around 101%. FY18 AFFO increased 6.8% to 5.8 dollars per share. This was due in part to the completion of Winyard Stage 1 and a lower level of maintenance CapEx. We continue to see dividend in AFFO growth given our sustainable dividend policy, a supportive strategy, strong market, an under rented portfolio. Turning to Slide 10. The revaluation gain resulted from a firming in cap rates supported by recent sales together with development gain nearly entirely in Auckland of $108,000,000. In Wellington, gross rentals and cap rates improved. This, however, was offset by additional operating expenses, mainly insurance premiums and rates. The increase in premiums reflected an increase in the fire service levy, higher replacement costs and an increase in market pricing. Across the development portfolio, $100,000,000 of unrealized development profit was recognized, reflecting construction and leasing progress to date. Excluding the 1 Point Street development announced today, there remains around $120,000,000 of unrecognized development profit. The majority of which should be recognized in FY19. Overall, the revaluation gain increased precincts portfolio value to $2,500,000,000 and was the key contributor for the 12.9 percent uplift in pricing NTA per share. Slide 1112 provide an overview of our capital management position. Borrowings over the year increased by $300,000,000 has been progressed our development at Commercial Bay And Bowen Campus. Associated with this increase, we undertook several capital management initiatives The convertible note and bond issue in the first half of the year increased our total facilities by $1,180,000,000 and increased the proportion non bank funding to 36%. Despite borrowings increasing, year in gearing remains unchanged from a year earlier at 25 percent due to the exclusion of the convertible note and the strong revaluation gain. Our weighted average debt cost fell in the period as we continue to draw on borrowings to fund our developments. Hedging sits within policy, and we remain comfortable with our current position. As Slide 12 demonstrates, we continue to take a proactive approach to capital management. The $250,000,000 of non bank funding secured in the period provides important tenure in funding diversity. Post balance date, we successfully refinanced $460,000,000 of bank debt, which was due to expire in November 2020. The refinance extends our way to facility expiry to 4.1 years, and provides for a more landed profile. Overall, we have capacity and liquidity to fund all our developments in progress. The sale of 10 Braden Street and the 50% interest in the Anzied center will provide funding to deliver future developments. With the sales reducing our pro form a gearing at June to around 19%. The part sales AMG tender was achieved at a 12% premium to book value. This reflected both the strong interest in the asset and a preference by potential purchases to enter a long term relationship with precinct. The sale takes the value of assets sold by precinct since 2012 to around $500,000,000. In line with our strategy, this has reweighted the portfolio to Auckland and enabled us to recycle capital out of assets like ANZ Center and into high yielding development opportunities. Finally, earnings and dividend for 2019 are expected to increase to around $0.066 per share. Lessing momentum, construction progress, and today's announcement of One Coin Street, provide us confidence with our earnings outlook. Consistent with dividend policy, we anticipate growing the dividend for the 2019 year by 3.4 percent to 0 point 0 6 dollars per share. Would now like to hand over to George to take you through the 1 Queen Street Development. Thanks, Richard. We are very excited to be announcing a major investment today with the redevelopment of 1 Queen Street. 1 Queen Street is Auckland's finest address. The building has a unique position on Oakland's waterfront and in the heart of commercial Bay. It's ideally suited for conversion to a complimentary of luxury hotel and office uses, with an iconic rooftop hospitality offer. The hotel will be known as the InterContinental Auckland, and we are delighted to 15 year management contract with precinct as owner. This means that the hotel net profit will be precinct's investment return. Sitting in both the hotel will be 7 premium office floors with incredible views over Auckland Harbor. With just 8700 square meters, the office represents a fairly exclusive opportunity. As a result, these floors have attracted strong interest from occupiers ahead of us launching the project. And we have already signed a heads of agreement on commercial terms with an occupier for 3700 Square Meters of this space. Moving to Page 16, the development increases the overall lattable area of the building by around 2 1200 Square Meters This is made possible by a more efficient use of space for plant, which creates an additional office floor. A relocation of the 2nd core and far exit as well as through its own dedicated lobby, which is in a similar position to the current lobby of Queen Street. The expanded floor plate and relocation of the fire stairs provides for a highly efficient 1360 square meter plate with a full height glazed facade. The hotel entry will be located on the corner of Queen Street And Keith Street, and this is shown on the next slide. With level 1 housing the lobby, leading suites, and hotel food and beverage, as well as having a direct connection into commercial bay retail. The hotel rooms and suites will be located over levels 3 to 13. There are a number of occupiers of One Queen Street who will be relocating into other precinct buildings following completion of commercial bay. This will see us commence construction in the first half of twenty twenty following those relocations. And we expect the hotel to open in early 2022, followed by the office and rooftop bar completing in mid-twenty 22. We have agreed a fixed price contract with Elton McGinniss, They are well known to us from their work on the redevelopment of Bowen Campus and also bring their relevant experience as an apartment builder. Moving to Page 17. The project will be fully funded from existing debt facilities. And after taking into account sale of a 50% interest in ANZ Center, our committed gearing will sit at around 34%. The return metrics are attractive in our view with an expected stabilized yield on cost of around 7%. Importantly, this represents accretion to earnings per share value on completion is expected to Moving to Page 18. While we acknowledge that exposure to hotel investment and returns is a new step for precinct, We believe The addition of several 100 hotel guests to the precinct each day will be another driver of demand for the retail and food and beverage offer at commercial Bay. And will be highly complementary to the demand patterns from our on-site office population. We see the intercontinental Auckland as being the number one preferred location for tourists and corporate travelers alike. Turning to the hotel market on Page 19. It has been well publicized that the market has experienced very strong growth in demand over the last 5 years, and this has translated to growth in room rights of over 50% through that period. The growth has largely come from international visitor arrivals, which have grown by 7.5% year on year over the last 5 years. And I said at around GBP 3,700,000 per annum. These are forecast to continue to grow from current levels to around GBP 5,000,000 per annum by 2020 4. The strong growth in room rates has seen a supply response with a number of hotels currently under construction and several other new projects noted. Research shows that based on demand projections underpinned by growth in visitor arrivals and the convention center, there is still expected to be a shortfall of some one thousand rooms even after delivery of the current supply pipeline. Additionally, we are of the view that the current construction market challenges and the continuation of escalation and build costs where Maine, not all of the Alliance hotels will end up being built. We are therefore confident that the intercontinental opened will be met with strong demand will perform well. I'll now hand back to Scott. Thanks, George. Now turning to Section 3 Development. On page 22, we moved to Commercial Bay. Commercial Bay has benefited once again from a significant lift in its completed valuation having achieved further leasing success. The expected profit on completion is now forecast to be $283,000,000, representing our profit on cost of more than 40%. During the year, we have lifted our retail commitments to 76% of the available space. This is a major movement and demonstrates and mix of retailers and very pleased that we'll be bringing some new entrants to the New Zealand market. We've also lifted our total commitment in the office building, which I'll discuss in more detail shortly. From a management perspective and having regard to our long term earnings pathway, we retain a strict focus on our yield on costs, This has been maintained at 7.5 percent and is a key contributor to our expected growth in earnings over the short to medium term. Please, the leasing transactions completed in the period remain consistent with feasibility and have assisted in seeing the value on completion for this development now exceed $1,000,000,000. Over the page, we provide some more detail on the retail leasing to date. With the anchors now secured, the focus has turned to specialty leasing, in particular, fashion and food and beverage. We have at a range of high quality retailers across both fashion and food and beverage, and I'm really pleased with the retailer mix. Aucklanders and visitors alike will shortly get their first glimpse of how great commercial bay is going to be with the 1st stage of retail opening on the 30th August this month. H And M will be opening their 3800 Square Met store, which we'll be offering for the first time in New Zealand H and M's entire range including men's, women's kids and homeware. Now turning to page 24. We have lifted our office commitments to 78% in the period with all new occupiers sourced from outside of precincts portfolio. All leasing in the period has been completed on terms, which are consistent with our valuation and feasibility. With this progress in the period, there now remains just 6000 square meters left to lease after our decision to proceed with two floors of fitted out small suites. The decision to proceed with a small suite offer fell significant investigation into the segment of the market. As outlined on the bottom of page 24, leasing of space in the 0 to 4 square meter range generally makes up the majority of the space leased in the Auckland market. Presync has traditionally not participated in this market However, with an efficient floor plate and confidence, precinct believes a small suite offer will be complementary and value accretive to the wider portfolio. Now turning to Programme. As outlined in February at our interim result, throughout the project, Pregent our precinct has used an independent program expert in RCP to provide us with advice regarding the progress on-site and the expected completion date. Pleasingly, our main contractor Fletcher construction has now engaged fully with our team to determine the current status of the site and consider the program to complete. This engagement has been highly beneficial for the project as it gives us as the developer and owner the confidence that the new program to complete is achievable, having discussed openly where risks and opportunities lie. The revised program will see the retail center opening in September 2019 and the new PwC C tower opening in December 2019. Importantly, precinct remains comfortable with the provisions of its construction contract which protect it from potential losses, which are borne about from delay caused by the main contractor. Therefore, it is not not expected that these delays affect our total project cost as liquidated damages will effectively mitigate the impact of the delay. Now turning to Bowen Campus on Page 26. The Bowen Campus development continues to progress in line with its budget and its program. In the period, the Crown have determined that the New Zealand Defense Force will take on a head lease of the Bowen State Building for a period of 18 years. Pleasingly, the development profit for this project has increased to 18% following an increase in the project's value on completion to 204 1,000,000. The yield on cost has reduced slightly to now sit at around 7% following a material increase in insurance premium and an increase in rates for the site. It is anticipated that the Charles Ferguson tower will be complete in December this year while the Bowen State Building will complete during 2019. Now turning to page 27 and focusing on 1 year quarter. Pre sync has secured development rights over certain land in the Wynyard quarter, which offers us the opportunity to develop office buildings when we wish to develop them. With the 1st stage of development now complete, precinct is focused on the 2nd stage, which consists of an 8000 square meter building. We are buoyed by the demand we have received in the generator space within our first stage, which is now recording occupancy of well the 70%, giving us confidence that any future development will attract good demand from similar occupiers from within the innovation precinct. Following stage 2, there is a further two sites which offer another 22,000 square meters space, which we expect to develop over the next 5 to 6 years. Page 28 sets out the latest design for the remaining land at Bowen Campus. This land consists of around 4000 square meters and will allow development of up to 20,000 square meters of office space. We are excited about what this land and these latest designs can offer both the corporate market and government occupiers. The buildings have been designed to offer a very high seismically resilient building with dampers installed to withstand significant seismic events. Page 29 provides a useful summary of precincts development activities. Allowing for the inclusion of 1 Queen Street, the development portfolio now offers a blended profit on cost of 35% and a blended yield on cost of 7.3% As stated at our interim results, as a business, we have adopted targeted returns for future developments of 15% profitability and the 7 percent yield on costs. As demonstrated with 1 Queen Street Redevelopment, we believe returns set at these levels provide shareholders with meaningful returns for the associated risk of development. Excuse me. Now turning to page 31, where we provide an update on the markets we are operating within. The Auckland City Center economy is continuing to demonstrate significant growth as outlined in the chart on the top right hand side. All considered GDP growth has been on average above 4% for the past 8 years, resulting in higher employment growth and generally leading to higher population growth. Of the employment growth that has occurred, 60% of that occurred in industries related to the This is demonstrated in the Cbd employment change chart, highlighting that over the past 8 years, the city centre has benefited from significant growth across a range of sectors. The next few slides set out our views of the demand and supply outlook for Auckland's office occupier market. As outlined at the start of the presentation, we believe that with significant headwinds for office developments and considering further demand for space, there could well be a supply shortage in 3 to 5 years time. Honda's benefiting from significant growth in resident population with recent evidence demonstrating that the growth to date has been several years ahead of further, it is forecast that there will be a further 30,000 in the city residents in Auckland over the next 10 years. Consistent with this trend, it is expected that the working age population will also grow by up to 50% over the next 20 years. In the short term, it is our view that over the next 3 to 5 years, we will see a further 10,000 workers in Auckland City Center as the elevated level of activity will require more workers leading to demand for at least another 100,000 square meters of space. From a supply perspective on page 33, we have highlighted what we believe to be the main impediments to new supply materialize most obvious is the continued pressure on the construction industry. The construction industry is facing severe capacity issues, is leading to significant cost escalation and an inappropriate level of risk for developers. To illustrate this point, we have set out on the following page where we see potential commentators currently. All interest on this slide is the anticipated withdrawals from the Auckland office market forecast over the same corresponding period. Again, it is our view that there will be stock withdrawn from the market between now and 2022. Therefore, it is our expectation that there will only be around 11,000 square meters of supply per annum over the next office market to provide some useful reference points. As outlined on average, over the past 20 years, the Auckland office market has achieved 23,000 square meters of absorption, while in the past 6 years, 6 to 7 years, we have seen increased density levels also achieved. It is precinct's view that the majority of the consolidation from increased density ratios has already occurred. To summarize our views of the current supply demand dynamic, page 36 sets out our view that the Auckland office market could well be undersupplied in 2021 to 2023 as we continue to see good growth in demand but limited new supply due to construction cost escalation and projects which are simply not feasible. Now turning to Wellington. Wellington remains as New Zealand's capital city. While it doesn't have, as well as growing demand from the Crown. Our focus in this market remains on our Bowen campus land, which we believe is well positioned to meet the needs of the government or corporate occupies. I'll now hand over to George to take you through the investment portfolio. Thanks, Scott. Our investment portfolio remains in good shape. We have continued to see available space in both Auckland and Wellington being met by solid leasing demand. This is enabling us to drive some good growth and contracted rents across new leasing and capture under renting in the portfolio. The 2 significant expiries within the portfolio are IAG at 1 Willow Street in Wellington, who moved to new premises in May and QVE who expired later this year at the A And P Center in Auckland. Pleasingly, we have a good leasing success across both of these expiries. At AAON Center, we have now leased 3 of the expiring floors with a further 2 being marketed for lease and currently under refurbishment. This has been the leasing there has been achieved at an 18% uplift to previous contract rents. As well as that, all the new leases are net leases. While the expiring lease was gross. At AMP Center, 2 of 3 floors are not leased with terms agreed on the balance This has been achieved at an average uplift of 17% from passing rental levels. On page 40 and looking across the portfolio, the strength in leasing is also clear. Wellington has had an average uplift of 15% on previous contract, Auckland has averaged 8%, however, this has been somewhat subdued by short term retentions to keep holding income at 1 Queen Street, prior to commencing redevelopment. Moving through to Page 41, the AMP Center provides a good case study of how we are looking to actively manage assets to drive stronger returns. A and P center benefits from a very strong location whilst being at a competitive price point. As mentioned already, QBE expirulated this year, and there has been a significant amount of leasing transactions, totaling 8600 square meters in the building over the last year. These have added significant value as well as improving amenity. Key transactions include the New Zealand Transport Agency, who have and a new lease across two floors as a relocation from 1 Queen Street. Kinder Care, I've also committed to significantly expand the childcare facility which will cater to growing demand as commercial bank comes online. 3 years ago, fully leased rent roll for the A and P center set at $8,300,000. Today, that is lifted to $9,000,000 and the new leasing we have committed, This will further increase to $10,500,000 over the next couple of years, which is a significant uplift of 26.5%. At the same time, we've continued to reinvest in this asset both in terms of mechanical services, planned new end of trip facilities, and capital works to support new leasing such as the Kinder Care facility. The returns from this are strong. And if we compare the growth in contract rents across this period, this will represent a yield on cost of 14%. This is inclusive of all maintenance capital expenditure items. Page 43 provides an overview of our lease expiry profile, which is in good shape for the next 12 months. Spires, which are noted on the right hand side. For the following 12 months after June 2020, this includes the expiry of occupiers relocating to commercial Bay from the ANZ Center. This will be a major focus of leasing activity over the next 12 months. Moving to Page 43, this provides a summary of the leasing progress across our development assets since we committed to commercial buy in 2015. And shows the extent of leasing completed. 3 years ago, we had around 30,000 square meters in total of uncommitted office space. Since then, we have completed over 20,000 square meters of leasing deals. If we take account of the new space at 1 Queen Street and the leasing commitment we have agreed there, The remaining office space we have to lease nice sits at around 11,800 square meters. For both Commercial Bay and 1 Queen Street, we are confident around demand for the remaining space. Moving now to generator on Page 44. We continue to see strong interest from a range of occupiers the generator offer. The reasons vary, however, smaller businesses are increasingly drawn to the ability to access Prime Office Space, with a level of amenity that's usually reserved for larger businesses with significant premises. Added to this is a high level of service the opportunity to be part of a community as well as flexibility to accommodate growth without needing significant capital investment. For many businesses, they're finding this compelling, and this is ranging from startups, local smaller businesses who are relocating from standalone offices and global, mainly technology businesses who want to manage local presence. While still relatively small, generator has been on the steep growth path during the last year from one location to 3 and less than 3000 square meters to around 13,000 square meters. Our largest new site is at grid AKL and Winyard Quarter, which has an innovation and technology focus. In 10 months, this has gone from launch, to NICE set at over 80% contracted occupancy across more than 6 1600 Square Meters of Space. Our newest site is at Bredemarck Place, which launched in June and have already secured close to 60% contracted occupancy. Both of these sites have performed ahead of expectations. However, during the trading up period, all of the costs are expensed. This has resulted in a $2,300,000 loss recorded for the period. Over the next 12 months, our focus is on stabilizing these new sites that we've launched and driving good levels of occupancy. This should see the business overall become profitable and on a financial year basis achieve breakeven and provide a strong platform growth. Importantly, for presync, the generator business is giving us exposure to a market sector of growing businesses and new entrants that we previously had little exposure to and helping us form relationships with these businesses, which will have expanding future property needs. I'll now hand back to Scott to conclude. Thanks, George. Precinct has a well defined strategy, which is focused on investing in city centers and being active We believe the results announced today demonstrate that the strategy is working well. Our markets are supportive and we see more opportunity believe that precinct is well positioned to create further shareholder value and develop high quality real estate and strategic locations. The balance sheet is well positioned, and we are continuing to take a long term view about our business. We are delighted to provide earnings and dividend guidance, which is consistent with our previously published long term earnings Thank session. Thank you. Your first question comes from Joshua Dale from Craig's Investment Partners. Go ahead. Thank you. Morning, guys, and congratulations on a strong result. Just a few questions from me. Firstly, on number 1, Queen Street. Total project cost of $298,000,000. Does this include the $91,000,000 value of the tower in its current state? Yes, thanks, Josh. Appreciate that, yeah, $298,000,000 includes all ongoing costs dollars. Okay. Thanks. And just on the heads of agreement on the 3700 square meters of office space at Nylon Queen, are these from current tenants or from outside the portfolio? No. That is from outside the portfolio too. Great. And, last question from me on your FY 2019 guidance of 6.6 dollars per share. What are you assuming for, the timing of settlement of the sale of 50% of the ANZ center there, because I noticed it's still subject to OIO approval. Hi, Josh. Richard here. We're expecting it to be October, November as the anticipated segment date. Thanks very much guys. Thanks, Josh. Thanks, Josh. Thank you. The next question is from Hayden Strickett from Forsyth Bar. Go ahead. Thank you. Hi, good morning guys. Hey, just a couple of questions from me. Just firstly on the insurance, could you just provide a little bit of color around when you reset that back in May in terms of how much that's listed across Wellington and Auckland? And then secondly, just around the market rents, I'm just trying to reconcile the valuations with the comment around being 6.4% under rented, at a port follow-up level, just looking at the level of cap rate compression, across the valuation, sort of suggest the net effective rents and the valuation were pretty close to flat. But then the underwritten in the portfolio has also increased, which seems a little bit inconsistent. Hey, Ed. I'll start off with on insurance, and then I'll hand over for the other question. There's a slide at the back of the in the appendix that splits out the increase. Overall, there was about a 30 percent increase in insurance for the year. Broadly speaking, a third of that related to the fire service levy change, another third of it related to increase in the replacement costs for the business, replacement costs for insurance purposes rose from overall about 16% and that was just a reflection of the essentially the construction cost escalation that we've seen. And then the last aspect was the change in market pricing As you'd expect, most of that increase was in Wellington for the increase in market pricing. So that's the market that's been impacted, most significantly. Thanks, Ashish. Hey, no, George here, I'll answer your second question, around sort of the valuation market rentals. So for Wellington, the average sort of uplift there in the market rentals was around 4.5%, at a gross level, but then that did have an offset of increased operating costs from many from higher insurance as Richard has just covered. Within Auckland, there's a range of, of movements, but sort of 1.5% to 2% range, and that would have been, flatter at the more at the more premium end and a grade with a little bit more growth, and than reflected in our underwriting position. Sure. But just to clarify that the 6.4% under into at a portfolio level is near effective? Yes, that's correct. Okay, cool. That's helpful. And then just last one for me. Just on 1 Queen Street following Josh's questions, can you provide any color in terms of the breakdown of that yield between the office and the hotel component? In terms of I can answer that in terms of the cap rate, which probably gives you a sense. So the yield from the cap rate on the hotel it's at 6.625 percent. And on the office components, it's at 5.125%. So the yields from the hotel is stronger and that sort of represents the risk that value is put, on hotel returns. At and hence the differential to the office. Okay. No, that's helpful. Hey, thanks for your comments guys. That's all from me. The next question is from Matt Goodson from Salt Funds. Go ahead. Thank you. Good morning, everybody. Just a couple of questions from me. Firstly, the liquidated damages for late delivery, that, is that in a great position, or is that still subject to, potential into litigation. And secondly, if you could just maybe talk a little bit more about the, return on investment from converting couple of floors to suites, just a little surprising, given it's sort of something that's normally done in far older buildings, And third question, just the, solidity of the leases, of the leasing to date given there's been, obviously, been some publicity some parties designed to pull out. If you could comment on those 3 things, please. Yes, sure. Thanks, Matt. In terms of the LVs, very typical within construction contracts, that the amount of LDs is already agreed, and it effectively formulaic. It can be subject to challenge when variations are made. And the construction company can seek extensions of time if there are changes made, which are late or which are outside of the scope of the original contract. Our view, based on the the number of claims that we've already received and settled to date in the progress that we're making through the contract is that, the LDs that's already been agreed as a party to the contract that we entered into a couple of years ago, we'll be more than sufficient to cover our losses, in terms of lost income. Whether they'll be subject to litigation in the future, yeah, they could be. But that's we're sort of certainly not at that stage. Okay. In terms of the ROI for small suite I think what we're identifying in the market and perhaps we've seen some of us through our exposure with generator is that there definitely seems to be a lot of growth in that, SME market but also, individuals or small groups of people that want to co locate together and be in their own fitted out office. And it's a part of the market that we haven't really participated in previously. The returns that we would be looking to achieve here would include the capital that's invested and would be targeting to be in excess of the sort of baseline returns that we're already achieving in terms of commercial base. So you know, we we we've seen good demand. We've seen it done really well in the market here. We've seen it emerges quite a strong trend in some other bigger market And we quite liked the opportunity. So we're looking pretty closely at that and expect that we'll go ahead with it. Your third question was around leasing in some parties that may not want to go ahead. We had one party that, you know, we have, we are in a legal process with them, at this stage, they are beginning to perform and meet obligations of their leases, which is principally around the, putting in place bank guarantees and they are undertaking that at HomeTOLD. So we don't have any material concerns there. Thanks, Matt. Thank you. The next question is from Tony Sherlock from Morningstar. Go ahead. Thank you. Good morning, gents. Just two. Further question on the suites. Can you describe the typical leases that apply to suites and there's a, I suppose, a standard, larger corporate floor plate and what the, I suppose, what the major differences are, differences Yes, Tony, it's George here. So, the main differences would be the lease term. Would typically be 3 year term. Whereas 6 to 9 years would be more typical for, for larger occupiers. And we also would aim to keep that as a simpler, more user friendly type document. And then the other sort of difference in terms of how, that space would be laced, that it's less of a sort of a right per square meter. And more of a sort of monthly monthly cost is how that market tends to think about the space. And just on the, I suppose the bank guarantees around the lease, if some of these smaller co working, I'm looking at the covenant risk. How much protections do you get for that full 3 year rental stream. Did you get a full 3 year bank guarantee over that? No, I mean, you typically would be not providing, much in the way of incentive in those cases. So you would have a level of guarantee but it wouldn't be for the full period. It'd probably be for, a sort of, say, a 6 month period. It's obviously a different, guarantee risk, but it's a different sort of leasing profile as well and making that investment and you'd expect that when you do a fill out of that space that it will be there for multiple occupiers over its life. And when you do your research on how those assets behave in a less than buoyant market, what what was the behavior of some of the tenants? Was there, was there, if there's vacancy opened up in other parts of a larger city and you said this is more common elsewhere, tenants exit early or do they stay and then move at the end of the term? Because in any portfolio, you'll have a range of, of quality of covenants. The difference that you'd have if you've got, if you have to say two floors of this type of space, you may have 1 or 2 that fall over in a tougher time, but you then have a small level of vacancy if you have a single occupier or 2 floors and they fall over, then that's all in that space vacant. So it's a different risk profile and there are, I would argue sort of mitigants to the common risk by the spread that you have. And I know that there was a question asked earlier by Matt. So how much of an ROI premium is there for the suites versus a standard corporate or larger corporate? Hi, Tony. Richard here. I think the key target that we're seeing at the moment is meeting the feasibility benchmarks that we have within our baseline feasibility. But we'd like to be able to beat that by 10% if we could. 10% profit or is that we have a weighted average lease term across the portfolio of, around that point 7 years. So having some additional space that's on shorter terms and something that concerns us. Okay. And then just on that, there was a comment earlier on, I suppose the market commentators have probably been to absorb some predictions. What were the main areas that that are those analysts and and the like were under estimating? We are confident in in our markets that we're operating in. And I think we have seen quite a divergence in views around the strength of the occupier market in Auckland. It's been really interesting and it's certainly been interesting from some of our Envisco, for example, who's our new partner on the ANZ. So they, they, they couldn't get their head around some of the commentary that was being provided in the market. We see really good growth, and that's evidenced by just the sheer amount of activity that's going on in Auckland, let alone the the fact that the economy is actually performing pretty well. We think this, this thematic around density going to 1 to 8 blanket across the whole market is just not going to play out. Our stock can't support us for starters. And secondly, the average size of your Pyr in Auckland is less than a single floor plate. So if you're trying to find, you know, 10% trying to shave 10% off floor plate, you're talking about taking it from sort of 900 square meters to 8 10. And those benefits and a workforce where you're trying to attract talent It's just not playing out that way. And we're fortunate enough, I suppose, to have a pretty large portfolio where we can test and understand and analyze just the extent of demand and whether density ratios are in fact going to sort to levels, which some people see, but we just don't see. So I think that that piece has been quite important. The second thing though is that we see demand being quite strong and Again, another example of that is, our exposure and generator. So we have effectively launched in the last 7 or 8 months. 10000 meters between Winiot Quarter And Brittemath Place of completely speculative space or uncommitted space. And in 1yard quarter, we're now above 80% and it brought them up already above 60% notwithstanding it was launched literally two and a half months ago. So we're in conversations with occupiers on a daily basis we're seeing these things playing out. We see good demand and we see it carrying on for some time. I suppose the angle I was looking at was on which sub sectors. So if it's healthcare education, financial services, I I can see professional services was the top category on that slide. Yeah. And I think what we're, I mean, we've also seen general admin and supportive services being really strong too at which makes sense when you've got activity levels elevated in the way that they are. That chart, I can't recall what page it's on. Sets out where the demand has come from. But generally, yeah, look, professional services, admin and supportive services as well as financial and insurance services. Okay. That's fine. Thank you very much. Thanks, Tony. Thank you. Your next question is from Nick Ma from Macquarie Group. Go ahead. Thank you. Good morning guys. Just a few, can you talk me through the construction contract for number 1, Queen, how it can be a 50% fixed price contract? We've agreed fixed prices with 50% of the subcontractors, and we'll work through between now and the rest of the year. To progress the remainder and move it to 100 percent fixed price contract. So is it that the construction, the main contractor is taking a different risk here than they usually would, or is this just, it takes time to get to 100% on the whole contract? I think it's a bit of both. So generally when you head into a fixed price contract, you will have a portion of the contract that's either a series of provisional sums, which are, which are estimates from your QS. And a situation where you progress your design really considerably, you can obtain 100 percent fixed price upfront. In this instance, particularly with the concerns in the market and, allocation of risk and the stage that you are at in terms of design, there's generally a managed approach in terms of how you get to ultimately a fixed price contract. And so 50% at this stage feels good for us given how far advanced we are in terms of design. And we're working through the balance of those trades. Our estimates for the balance remain good and we're comfortable with those. That's great. On kind of construction costs, one area we've seen a lot of inflation has been around fit out costs. Have you had any feedback from the tenants, particularly those going to commercial bay about affordability of that fit out and what they're having to stump up with and whether or not can help them more on those? Yeah. Construction costs generally, there's no question that they are continuing to rise. And whether it's fit out or more general construction, it doesn't really differentiate materials and labor. We have had some discussions with some of the occupiers that are moving into not just Commercial Bay, but also into our existing PWC tower or some of our other spaces with for that costs are elevated. Look, we don't we haven't had to help anyone out in terms of funding those, generally when a business is facing the decision as to whether they stay put or relocate considering sort of costs to fit out in their existing premises or in their new premises. So, the cost there generally is is kind of neutral. And then just on the kind of lease tails, you generally have kind of 6 months, lease tail buyout for some of the tenants moving into Commercial Bay. Given that the new completion dates, December, you guys and your tenant feeling comfortable with that level of certainty? Yes, we are. We still have quite a bit of headroom before we start getting close to some of the expiries for those parties that are coming from outside of the portfolio. Perhaps, when we first contracted to them, we actually felt like that period of time was too long. But, you know, as things have prevailed in the construction market's gotten harder and harder, it's sort of playing out that it's very helpful for us that we've got some decent headroom between we think we'll finish Commercial Bay in December next year and when some of those leases expire. So we don't have any, any, concerned there. Yes. No, that's cool. And then just lastly, what's your expected timeframe for the new hotel to ramp up to give you a 7% stabilized yield? Yes, it's an interesting question. Nick, because at the moment, we're seeing, new hotels open and trade fully, from day 1. We think we will have strong demand and because of allocation. And so we hope that that would be the case. But look, it depends on what the market is like when we open in 2022. How long that takes But you typically would expect that to happen over the 1st couple of years. Thanks, Nick. Thank you. The next question is from Shane Sully from Harbor Asset Management. Go ahead. Thank you. Good morning guys. Just a couple of quick questions and they're pretty basic ones. Can you just start with just interested in what your thoughts are on net operating income growth. Given you've outlined a pretty firm market, can you talk about rental growth Can you talk about incentives, a bit of a guide on tenant incentives? It'd be useful to understand maintenance CapEx a guide on that. And then finally for me, can you just talk about expense ratio, please. Hi, Shane. George here. I'll try to tackle some of those to start with. Look, in terms of rental growth across the portfolio, you sort of Auckland stabilized assets. We are we've talked about some really strong leasing that we've seen on spaced become vacant against contract, which has been double digit. Going forward, look, I think we'll continue to see 2% to 3% growth coming through. But on but where we have expiring leases and then during some of the current underwriting in the portfolio, I think we'll continue to see some of that stronger, stronger contracted growth appearing. In terms of incentives, Auckland stabilized portfolio, we are sort of very modest levels of incentives. You know, up to maybe around half a month, per year of lease term. It's it's a bit more than that on commercial bay leasing, but still sort of through the stabilized portfolio, very modest. And depending on the occupier in some cases, we aren't we're just doing a net rent deal and, don't have any incentive involved. And Wellington, we're seeing good top line growth, but as we already talked about, our OpEx growth from insurance as has hurt us this year. We would hope that that would start to, moderate, in the next couple of years, which might help the net rent growth but we're seeing strong demand for available space. There is just so much space taken out of the market down there. But across are one well a straight and dimension dollar house assets. We're seeing good levels of demand and achieving rental outcomes, which are, again, double digit against what was previous passing. In terms of your question around the EMEA and the annual report, It has fallen in the year as the total portfolio values got larger and there's more capture of that the lower base fee amount. And on your question on maintenance CapEx, I think that goes to a lot about the assets that we've sold, that were quite hungry. And a lot of maintenance CapEx that was spent on those assets. In the period kind of 2012 through 2014, there was a lot of kind of catch up maintenance that had to be spent. I think as we transition more to a newer portfolio, that maintenance CapEx will come down to where we guided previously. We don't have that don't actually have the EMEA out of hand, but we can have a look at it. That's fine. I appreciate you. The detail will go and hunt it down. Thank you. Thank you. The next question is from Jonathan Davis from ACC. Go ahead. Thank you. Good morning, Scott and team. Thanks for the update on that AMP center. How much of that 15.4 of CapEx is still to be spent? I don't have the exact number, but it's a good portion of it, related to because it relates to leasing, which we have secured, and we have some CapEx, over here, I would say, if I had to make a guess we're less than 5, but around that level. And just digging into the yield on that 1 Queen Street a bit more, what is the sort of underlying occupancy estimate and average room rate assumption that you've got in that yield. Look, I won't go into the detail of the, of the sort of exact assumptions around room rate and occupancy, but generally, a stabilized level of occupancy sits in the 80% range. And the room rates that we are assuming are based on what is currently being achieved, for the top hotels in the current market. And so we think we will sit at a from a our offer will sit better than what's currently in the market. And that gives us comfort around, those levels. Was that kind of north of 300? Yes, it is. It would be in that sort of 3 plus range. Okay. That's it from me. Thanks. Thank you. There are no further questions at this time. I'll now hand back to Mr. Prichard for any closing remarks. Thanks, Jody. And look, once again, I'd just like to thank everyone for dialing in to the call. Some great questions. We're really pleased with our results. We're really pleased with your support. And, you know, if you have any other questions at any stage, please feel free to give us a call. Thanks everybody. Thank you very much that does conclude our conference for today. Thank you all for participating. You may now disconnect.