Earnings Call: H2 2017

Aug 16, 2017

Thank you for standing by, and welcome to the PreSync Properties Full Year Results Conference Call. All participants are I would now like to hand the conference over to your speaker today, Mr. Scott Prichard, CEO. Please go ahead. Thank you, Amber, and good morning, everybody, and welcome to the 2017 annual result leasing for precinct properties. I'm Scott Richard, and I'm the Chief Executive for precinct, and I'm joined by George Crawford, Precinct's Chief Operating Officer. Before we start, I would like to acknowledge Richard Hilda, who is our newly appointed Chief Financial Officer for precinct. Richard was due to be with us for this result briefing to present the finance section, but won't be joining us due to some personal circumstances. What I can say is that we are delighted to see Richard be promoted through the business following his significant contributions over the past 7 years. The 2017 financial year has been a very good one for the business. We have completed the 1st stage of buildings that were near quarter on time and ahead of budget. We had progressed construction works at Bohn Campus And Commercial Bay And perhaps most pleasing, we have grown our portfolio occupancy to 100%. We've also woodstood a significant earthquake in Wellington, in November last year. 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 2 of the presentation. I'll shortly provide an overview of the highlights of the results before reviewing the company's strategy and then taking you through our major initiatives. I'll then hand over to George to summarize the financial results and capital management position for precinct as well as provide an overview of the market and our portfolio. I will then provide some concluding comments upon completion of the presentation, we will be happy to answer any questions which you may have. Moving to the highlights page. Undoubtedly, the major highlights of the business is recording 100 percent occupancy for the investment portfolio for the first time in the company's history. This is a major achievement for the business and reflects the high quality real estate held within the portfolio as well as the tight occupier market, which we are currently operating within. The completion of Vineyard quarter stage 1 is also very pleasing. As this is the first real completion of a Greenfields development and to complete this with 100% occupancy and record an 18% profit margin is very satisfying. In terms of our development strategy, we have continued to progress $900,000,000 of developments at Commercial Bay And Bowen Campus with the total office pre commitment across both developments now sitting at 80%. Commercial by retail commitments have increased to sit at 46% and reflecting the quality of the asset we are now reflecting a return on cost of 31%. At Bowen Campus, we are pleased to advise that the Crown has notified us that they will be exercising their options to lease the remaining floors at Bowen Campus, taking this development to 100% committed for the office space. At an operating level, not only have we seen occupancy turned to 8.7 years after including our development pre commitments. We are pleased to record a net profit after tax of $162,000,000 after obtaining another strong revaluation gain on top of further growth in our operating earnings. With earnings per share landing at $0.061 per share. Today, we are excited to announce that we are considering the issue of a subordinated convertible note for up to $150,000,000. Precinct's capital management strategy strategy. And today's announcement is a further step in matching our capital needs with the needs of an investment company that has significant development upside, which is yet to be recognized. As you can see it has been a busy period and we are very pleased with the position of the business. Will now ask you to turn to Section 1 of the presentation, and I'll provide an update on our strategy and progress for our major initiatives. Preasing is a specialist City Center Real Estate Investment Company. It invests in high quality real estate which is strategically located with a preference for concentrated ownership of amalgamated sites. Significant benefits for its occupiers, which will ultimately flow to demand, rental levels and value. The current strategy has most recently been reviewed in 2012 and has evolved materially since the company was first listed in 1997. Preasing is a city center specialist and while office real estate is at the heart of the portfolio structure, the board and management agree that in order to be specialists a city center context considering a broader mix of real estate offers greater opportunity for precinct to create value for shareholders. Moving to a more active management approach has also resulted in precinct preparing to now create its own real estate, which we are seeing through its extensive development activities. During 2017, management has developed further its strategic perspective and refined its focus into 3 distinct areas, including our people, our portfolio and our strategy and relative to the 3 key areas of focus. Since 2012, we have materially shifted the focus of the business through the acquisitions of Bowen Campus, Downtown Shopping Center HSBC Building and more recently Queen Elizabeth Square. As a consequence, we now have 3 large regenerative projects underway. Importantly, of these projects, 2 of them are of a mixed use nature, which is consistent with the direction of the business strategy. Importantly, on completion of commercial bay, we will see Precinct's total retail exposure lift from 4% currently to be around 18% of the portfolio value. As we have advised for the past 4 or 5 years, we have continued to shift our focus towards Auckland and now have over 70% sales completed and the development activities which are underway, we will have a portfolio with an average age of just eleven years. Which will drive significant savings in annual maintenance CapEx. In addition, and consistent with our drive for increased quality, we are today announcing our committed weighted average lease term of 8.7 years, which is a significant increase over previous years. And finally, with regard to operational excellence, we are delighted with our year end occupancy result of 100%, which is an all time high for precinct. We Our third pillar and perhaps most important is empowering our people. We have grown our team considerably and the management company now provides all functions the business, which is a much preferred outcome. Our people are a key competitive advantage for our business and continuing to leverage the capabilities of the team remains as a major opportunity. Our team remains highly engaged with around 80% engagement And pleasingly, our clients remained very satisfied notwithstanding that majority of our clients have had to withstand significant disruption throughout the Auckland portfolio. Now turning to page 7 and a focus on Auckland. Undoubtedly, Auckland is in a very good position. As New Zealand's only gateway city, which is growing strongly and is increasing its contribution to New Zealand's overall GDP. One of the key statistics which we focus on is the working age population of Auckland. Its trends and its expected impact for the City Center. Our research shows us that there is forecast to be an additional 416,000 working people in Auckland over the next 20 years, which is expected to drive considerable further demand for City Center Space. The key drivers for Auckland remain unchanged with continued growth in net migration, considerable capital spend on infrastructure and construction activities, as well as continued growth in Auckland's tourism market. From a Cbd perspective, page 8 sets out the impact on Auckland City Center of the major themes which are currently playing out at present. We continue to see an increase in the City Center's market share of overall office space with 22% of Auckland's office space being located in the Cbd. This has increased materially over the last 5 years with growth in employee numbers from 60,000 to 80,000 over a 5 year period. We are observing more demand for Cbd based resident which remains as a positive influence for precinct. This market continues to interest us as a future opportunity for mixed use developments. Similarly, we have also observed significant growth in demand for hotel space in the city with like for like room rate growth of 13% over the past 12 of the committed and forecast private and public investment, which is occurring in Auckland City. Each of these items are expected to have a meaningful impact on the Cbd, And as illustrated on the slide, the majority of the works are occurring in close proximity to Commercial Bay. You will note the extensive public regeneration, which is set to occur on all surrounding streets of commercial bay, which has been a major area of focus for present. Dialogue continues in this respect with the CRL team and Auckland Council as the integration and sequencing of these works remains as a key focus. In terms of the Wellington Cbd, this market remains very fluid following the impact of the Kikeura earthquake and the stock withdrawals which have occurred or are likely to occur. You will note on this slide that there are a number of sites which are emerging as potential development sites. It is our expectation that there will be additional development activity in this beyond what is already committed as a response to Now turning to Section 2, major initiatives. It is very satisfying to reach this milestone where we have now completed our 1st development under the provide strategy with the 1st stage of Vineyard quarter completing in the period. The 1st stage of Vineyard consists of two buildings, and on a combined basis consists of around 13,500 square meters of office space. The construction of this stage commenced in late 2015, and it is pleasing to have this development completed ahead of program and consistent with budget. Post balance state, it is worth noting that generator, which George will talk about shortly has been appointed by AT to manage grid AKL, the innovation precinct. Over the page, we provide more details of 1 year's quarter. At the commencement of the project, we were forecasting an as of complete valuation of 98 $1,000,000. Following completion of the project, we are pleased to advise that the completed valuation has increased to $107,000,000 an increase of $9,000,000. This gain of value has been achieved through a range of bases, including higher rental levels, some cap rate compression through the development phase and also achieving 100 percent occupancy on completion. Due to the significant gain and value on completion, presync is required to pay an additional super profit payment to Panuku Development Auckland which sees our overall project cost increasing to $91,000,000. An additional cost item for precinct has been the payment by precinct to the manager for a performance fee equivalent to $700,000 as a consequence of the development outcomes being significantly ahead of forecast. Following these additional cost items, the outturn metrics result in precinct generating a development profit of 18% or $16,500,000. On page 15, we now moved to Commercial Bay. Commercial Bay has benefited from a significant lift in its completed valuation, having achieved further leasing success higher rental levels and some cap rate compression. The expected profit on completion is now forecast to be $213,000,000 representing a return on cost of more than 30%. During the year, we have lifted our retail commitments to 46% of the available space. This is a major movement reality reasons, we are delighted with the composition and mix of retailers and are very pleased that we will be bringing some New Zealand entrants to the New Zealand market. We have also lifted our total commitment in the office building, which I'll discuss in more detail shortly. Of significance for the project, we are announcing today that we have taken the decision to re phase the programmed opening dates for the retail center. We had previously been targeting an opening date of late October 2018. Following advice from our independent experts, due to the likely timing of completion of the construction works, we have decided to open the retail center at the end of quarter 1 in 2019. While the majority of the retail opening is delayed, we are pleased to be able to open around 20% of the retail which will now open in mid-twenty 18. It is not expected that these delays will materially affect our total project cost And it is important to note that precinct remains very comfortable with its fixed price construction contract. Our main contractor on-site is doing a good job and the teams are working well together. Over the page, we provide some more detail on the retail listing to date. The key areas of focus so far have been to secure the key anchor retailers and flagship retailers, which is now largely complete. The rental levels achieved to date have been secured at a 3% premium to our base feasibility, which has contributed to our positive valuation outcome. The average term of the leases secured to date is over 9 years, reflecting the strong desire which retailers have of being located within commercial bank. It is our expectation that lease terms from hereon will have a shorter term in order to position the center for future revisionary opportunities. Now turning to page 17. We have lifted our office commitments by 10% points in the period with around 4000 square meters leased from outside of present's portfolio. However, because some of our existing pre commit clients have elected not to take up some option space, which they have the right to. Our total commitments on the tower is 66%. It is worth noting that most of the options have now been exercised and there remains only very minor further options available for existing clients. Management view this positively as it demonstrates the true efficiency of the floor plate which has been designed for commercial bay. Similarly with the retail lease terms, the office leases have been secured at a 3% premium to feasibility rents demonstrating the strength of the Auckland occupier market and the quality of this office tower. The average lease term to date remains at around 13 years and we expect the lease term on completion to be around 12 years. We remain very comfortable with the residual space given we have a further 2 years before practical completion and given that we currently have around 6000 square meters under offer. Now turning to Bowen Campus on page 18. As outlined, the Crown has notified us that they will be exercising their right to lease the remaining vacant floors at Bohn Campus. This takes the office space to being 100% leased and retains the average lease term at 15 years. In conjunction with the elections to lease the remaining space, the Crown has also advised that a new lead will be leasing the space following the impact of the Kokura earthquake and the number of crown buildings which have been withdrawn from the market. The works to date have been progressing particularly well with LP McGinnis, our main contractor performing very well on-site. The works remain on program and on budget. And following a positive revaluation at year end, the feasibility has improved with an expected development profit of $30,000,000 which was providing a return on cost of 15%. Management remained focused on future development opportunities which exist within the business. And outlined on page 19 of the presentation is an overview of the most prominent opportunities, which include 1 Queen Street, the future stages at Vineyard Quarter And Future Stages at Bowen Campus. Each of these opportunities are of a very high standard and provide the business with feasible opportunities given that they were secured many years ago when asset values were at a lower point. The timing for these opportunities remains unclear with demand and access being key drivers for us to consider wind deciding when to proceed. The most likely next opportunity is at 1 year quarter where we hope to commit to the 2nd stage within the next 12 months. Page 20 provides a useful summary of precincts development activities. Following the completion of Winyard quarter, this development is now considered part of the investment portfolio. And consequently, our committed development by size has reduced around $900,000,000. Of that $900,000,000, we are forecasting a yield on cost of at least 7.5% and a total development profit of around $250,000,000, reflecting a return on cost of 27%. Of this forecast development profit, it is important to note that there still remains over $160,000,000 of development profit, which has not yet been recognized. With the progress made during the period on leasing, we are now in a position where the total office leasing sits at 80% across Commercial Bay and Bowen Campus, and our total pre commitment for both projects, including the retail, is now over 70%, which has further derisked the projects. And the quality of the real estate is world class. On completion, precinct will benefit from having the highest quality real estate in the country and will have an average lease term of around 13 years providing shareholders with significant comfort about future rental levels, cash flows and dividends. Now like to hand over to George. He will take you through sections 23. Thank you, Scott. Morning, everyone, and thanks again for dialing in. Our 2017 financial results reflect some significant but expected changes within the business. As we progress our developments, as well as showing the resilience of the business to some unexpected challenges that we face during the year. While revenue was impacted as development was undertaken, as expected, this was offset by reduced interest expense and a low effective tax rate. However, the Kikeura earthquake in November meant we had a significant unexpected loss of rental income at the Lloyd House as well as around $1,000,000 in seismic repair costs to expense. As set out on page 23, Plasingly, the balance of our portfolio recorded a very strong result with stronger than expected rentals from Nice and Brothers, at putting our quarter being fully leased on completion, stronger than expected portfolio occupancy, particularly in Oakland, as well as extended occupancy in our government assets due to deferral of some of those capital works. On page 24, we set out a full reconciliation between our reported accounting profit, net operating income after tax, funds from operations and adjusted funds from operations or AFFO. Pleasingly, we have maintained a close match between our dividend for the year and recurring cash flows. With our dividend for the year being 103 percent of AFFO and 84% of FFO. Moving to page 25, over the course of the year, we invested around $230,000,000 in our development projects as planned. Which saw a gearing lift to around 25%. We continue to have the benefit of our significant committed bank facilities to cover these development commitments. Which were put in place in 2015 and benefit from better pricing and terms than we could access in the current market. As Scott mentioned, we are considering a subordinated convertible note issue to raise up to $150,000,000. We think this is a capital management solution, which is well suited to Precinct's current strategy and opportunities. As will get us the comfort of having the capital available to match our development commitments, while ensuring that earnings are not diluted in the short term. Importantly, should further opportunities not eventuate, resulting in the capital not being required, Precinct maintains flexibility to not convert the notes to equity, and instead repay the notes in cash. As set out on pages 2627, the notes will be subordinated to presync other debt. Will pay a fixed rate of interest and have a term of 4 years. In addition to interest, note holders will benefit from appreciation and the share price above a fixed price, which will be set at a premium to the current market price. To conclude the finance section and this is probably the most critical slide our business as we continue to focus on delivering our long term strategy. On page 28, we provide a progress update compared to the earnings pathways we published in 2014 2016. Pleasingly, our earnings remain on this track. Equally importantly, we are achieving the targeted lift and portfolio quality. The chart on the top right hand side shows the very significant shift in our walk, which has already occurred as a result of development activity, with the walk by sitting at almost 9 years, compared to 5 years in 2015. The bottom right hand side chart demonstrates the reduction in the average portfolio age which is now on track to shift time to around Moving to page 29, our earnings for 2019 are forecast to increase to $0.063 per share. Consistent with our growing confidence that our business will achieve the earnings pathway, we anticipate growing the dividend for the 2018 year by 3.6 percent to $5..8 per share. Moving now to the operations and market section of the presentation. On page 31, we are pleased to be able to present for the first time a chart which shows all of the billings in our portfolio being 100 percent occupied. The portfolio world is also setting at a very strong 8.7 years, which as I will talk to you shortly has been lifted by some significant leasing deals in our investment portfolio as well as being underpinned by development activity. With continued market rental growth, we are also developing a significant under rented position, currently sitting at around 5% below market at year end. And largely seen in our Auckland portfolio. This gives us further confidence around our earnings growth prospects, and I will talk a bit later about how this uplift will be captured. As outlined on page 32, we have completed a number of deals in the period, which has seen us retained, facilitate growth for some of our key occupiers. We concluded a very significant leasing transaction with Buddl Finlay, which resulted in a 12 year commitment across over 6000 square meters in both Wellington and Auckland, making them our 5th largest occupier. We also retained A and P in the A and P center for over 4000 square meters on a 10 year term, which underpins that asset. We're currently working with a number of occupiers in our portfolio who are having real difficulties and managing their growth requirements in a very constrained open market. One example of this is CBRE where we have facilitated their expansion for our new LACID IIM Vet Center. While the space that they left behind has been leased by ANZED Super, they have committed to a new 9 year lease at zero cost over Three Floors. It was particularly pleasing to also see our 2 Wellington Corporate Assets, State Insurance Tower And Dimension Data Heights achieved full occupancy which reflected a big effort from our Wellington team across a number of late deals. Looking forward to completion of commercial buy. The PwC space at 1 at 8 Key Street is now largely leased, and we have good interest in the remainder of the backfill space at AMZED Center. Given the demand we are currently seeing across the portfolio, we are confident that this In terms of rental growth, over the last 12 months, the major avenue for securing that rental growth has been through lease renewals, and proactive lease management of the sort I've just described. But many of these being concluded well ahead of lease expiry. For Auckland, this has seen us secure a solid 9.6 percent uplift in rentals compared to the previous contracted levels and all of the deals we completed. And Wellington by contrast, while we secured 100 percent occupancy, this was at some cost in terms of rental levels. Which were an average 4.9% lower than previous passing. This also reflects that these deals were largely concluded before the Kicor earthquake last November. Looking forward to the 2019 year, we have a fairly small level of expiries in the period with the key expiries shown on page 33. With very low levels of vacancy in both markets and little supply coming online in 2018, we are confident around retaining or releasing this space. Of note, we have already leased around 1 quarter of the IAG space expiring next year at State Insurance Tower and a solid interest on the balance of these floors. Consistent with this year, we have a relatively small portion of the portfolio exposed to market rent reviews Page 34 sets out a bit more detail on the underwriting position across the portfolio with significant underwriting being same in the Auckland assets. The chart on the right hand side shows the opportunity for that underwriting to be captured through either expiries or market reviews. All lines on that chart show that the portion of the portfolio, which will be reviewed to market on a cumulative basis over time. This shows that in 3 years' time, by 2020, about 60% of the portfolio will have been reviewed with around 90% being reviewed to market in the next 5 years, either through contractors of use or through expiries. As noted earlier, this gives us further confidence in our ability to grow rents and earnings. Moving to page 35, around this time last year, we announced the successful conclusion of negotiations with the crime across most of the government assets. The earthquake last November resulted in a significant portion of the buildings occupied by the government being taken out for repair or in some cases demolition. This is meant that agencies which were supposed to vacate their buildings so that we could undertake refurbishments have been unable to do so And as a result, those works have been delayed. The major impact of this to date has been that those income voids have been deferred. While the crime has contractual commitments to us, we're seeking to work proactively with them to accommodate their changing needs. While ensuring that there is no reduction in the returns for precinct. Moving now to reviews on the Auckland office market on page 36. Consistent with what we are seeing in our own portfolio, the open market is in great shape with continued strong demand and limited new supply. This is manifesting itself in both face rental growth and reduced incentives. I will talk to our valuations more shortly but we have seen continued compression in cap rates, driven by the strength of demand from investors for Auckland assets. The charts on the right hand side of this slide compares CBRE's projections for vacancy and rental growth from 2015 and their most recent projections. They confirm our view that the level of vacancy will be lower than initially thought and that this is unlikely to result in the level of rental weakness previously projected for 2019. Moving to page 37, the City Center retail market remains very buoyant with retailers attracted to the growing city center foot traffic as a result of more city center workers as well as tourists. We see City Center retail demand being somewhat insulated from the challenges from online shopping, which are faced by suburban shopping centers. On page 38, the Wellington market again reflects our own portfolio with virtually no vacancy as prime stock levels have reduced following the U. S. Outbreak last November. This is being seen in higher rental levels being achieved for cyclically strong buildings and the reduction in the incentive levels being paid. We concur with CBRE's view that this is likely to be sustained over the next couple of years. However, we remain cautious regarding the longer term outlook. We think this will largely be determined by the Moving to page 39, it's been well publicized that construction inflation is currently running at elevated levels. And we agree with the view that this is likely to be sustained for some time, currently forecast to run at 4.4% per annum through to 2021. When we contrast this with CBRE's forecast CBD rental growth, over this period of 0.6% per annum, there is clearly a disconnect and would indicate that new supply will be very difficult to make feasible. This reinforces the view that we outline on page 40, that the key drivers of new supply for Auckland are increasingly indicating that new supply is less likely to occur. The combination of elevated construction and finance costs with reduced funding availability, make it very difficult for developers to stack new projects despite strength in occupier demand. Moving to page 41, we announced back in February our intention to acquire 50% interest in the generator co working and shared office space business, which we see is very This investment was concluded in May and shortly thereafter, generator was appointed by ATED to run the innovation precinct in our buildings at Windyard Quarter. This was a very exciting early win for generator and will see the business roughly travel in size to be running around 10,000 square meters of space. The Wingyard quarter operation launches shortly, but are already seeing strong interest from businesses wanting to be based there to be part of the innovation precinct, and take advantage of a quality of office space and facilities, which aren't usually available to businesses of their size. We are also seeing early signs of more established businesses being attracted to using this sort of space, and we believe our generator investment gives us the opportunity to be at the leading edge as We recorded a strong valuation gain of $77,500,000 or 3.9 percent. The 3 main drivers of valuation gain were cap rate compression, progress on development assets, and increases in market rentals, and pleasing the market rentals contributed around 40% of this value growth. As noted on the chart on the right hand side of page 43, cap rates have now reached historically low levels in Auckland. While Wellington is back to near peak levels. By comparison, rental levels while growing are still below the 2007 peaks, as shown with PwC tower rents on the bottom left hand chart. Combining these 2 factors, the bottom right chart shows that valuations on a per square meter basis have firmly surpassed previous piece. Notwithstanding these historically elevated levels, we don't see any immediate signs of weakness. With stable occupier market fundamentals and recent market transactions and anecdotally attracting a good depth of demand from both local and offshore investors. Finally, on page 44, as you will be aware, our portfolio has been significantly impacted this year by the loss of rentals and devaluation at Deloitte highs. Due to the significant weaknesses identified in that asset following the earthquake last November. We continue to consider all options for the future of that asset, which includes strengthening or demolition of redevelopment. I'll now pass back to Scott to conclude the presentation. Thanks, George. In our view, the New Zealand economy remains in a strong position due to its population growth, construction and infrastructure spend and the emergence of tourism as one of New Zealand's primary markets. And while global uncertainty remains, New Zealand is well placed to continue to grow. Our city center property markets are strong. Auckland continues to perform very well with occupier markets continuing to grow and intense levels of interest in the investment market. Wellington remained sound and given the seismic events of last year, the market has changed significantly with large stock withdrawals and new demand for high quality space. We believe our strategy will serve us well with a very clear and targeted approach to our markets. Our strategy has been designed and we believe we are beginning to see the benefits of this strategic design beginning to emerge. In terms of outlook, we believe we are very well positioned of the proposed subordinated convertible note announced today. Where we are now is where we wanted to be 5 years ago. And we are pleased that things are going to plan. In 2020 and on completion of our current projects, We expect to have provided 8 years of cumulative earnings and dividend growth, while completing the quality of the portfolio. That is our goal. Thanks for your time today. We appreciate your interest and support and we're happy to take any questions. Thank you. Your first question comes from Nick Ma from Macquarie Group. Please go ahead. Hi guys, just a couple of quick ones. Just on the delay at the retail. Could you just talk through at what point you guys knew or made this decision and how that affected, I guess, the leasing timeframe and whether or not there's any issues around some of the other pre commitments that you had around the initial dates versus the current proposed dates? Yes, sure. So I suppose the work around understanding the program for the retail aspect of Commercial Bay has been ongoing for the last 2 or 3 months. And when you're considering a detailed program, it does take quite some time to understand the impacts of the current status and also what the likely timing is to complete the balance of the works. Really that review sort of was concluded literally in the last couple of weeks. And we've taken advice from experts and subsequently made the decision to delay the opening. We have discussed this with all of our committed retailers who are very understanding and are very appreciative of the fact that we've made the decision early and we'll continue to work with them around the likely timing of the opening and and ensuring that it's a successful opening, which has been sort of key driver for us. And just around, your construction contracts obligations on timing? Is there a source of compensation? Obviously, it's a $25,000,000 ish rent roll for the whole center. So the best part of 6 months late is a decent amount of loss rate. And how is that compensated for you guys? Yes, look, we have a fixed price construction contract attached to that contract as a program. With a completed completion dates. And so the extent to which there are delays, then there are clauses within the contract that protect us in terms of cost. Great. And then could you just talk to the reeval? Obviously, the final number came in slightly below the pre announcement. It looks like some movement in Deloitte. So just in terms of what was the decision point around that? Was it the auditors or someone else? And then finally, just around the valuation movements on the stabilized portfolio, obviously, there's a few moving parts around HSBC and Zurich being incorporated into commercial Bay development? Could you just talk to that as well? Yes, you're breaking up there. So I'll just repeat your questions for the benefit of everybody else. So in respect of, the valuation for Deloitte and what we announced in early July. The $89,000,000 reevaluation, which we announced at that stage, didn't account for the $12,500,000 evaluation that we'd already recorded at our interim. So when you overlay that, that's what that was what reduced the overall revaluation from 89 to 77 there or thereabouts. So that wasn't anything to do with auditors. That was just a consequence of the timing of each of those reevaluations and the fact that we recorded that initial devaluation for Deloitte at our interim results. The second question was around the movement and valuation for Zurich and HSBC. Hopefully, you will all recall, but some of you might recall that when we launched Commercial Bay in December 2015, We had an exit complete valuation of $853,000,000 And then we deducted $40,000,000 of that due to a forecast impairment for both Zurich and HSBC. Which reflects that the commercial bank retail development will in fact use ground First And Second floors of each of those assets. So we'd forecast that are that impairment. The deduction and the valuation for both of those assets at this valuation reflects that impairment that we'd forecast back in December 2015. I think the impairments for both of those is $43,000,000, so it's around what it was. When we launched Commercial Bay. Your next question comes from Hayden Stifel from Forsythiles. Please go ahead. Hey, good morning guys and congratulations on a strong results. Just a couple of quick ones from me as well. Firstly, on the retail, can you just talk to sort of the configure of the retail and I saw on your leasing brochure on your website, the split between the specialties and the mini majors seems broadly unchanged, but I noted there that the total space is 17800 now versus the initial of 20,000. So I was just curious if there'd been a slight sort of sizing there in the retail? And then secondly, just on the office leasing, sorry, George, can you maybe provide a little bit more color on your comments before you talked about some options from some of the existing tenants had signed up. And I'm just looking at your tower stack there, it looks like level 27, a half a floor there has gone now in terms of pre commit and you've picked up 38% 39%. So I'm just curious if those are the only two movements there? Yes. Thanks, Hayden. So, in terms of the retail mix, The leasing to date has largely taken care of the anchors and the flagships, but it's also secured a bunch of specialties and we're really pleased with the progress to date. I think from here, you'll see a lot more specialty leasing because of because of those flagships and anchors that have now been secured. The area of the retail did start literally a couple of years ago at around that 20,000 square meters. Through design, it has landed at 18,000 thereabouts. It's been sitting at about 18,000 for the last 18 months or so, although so, Apologies if that wasn't clear, but it is sitting at 18,000 square meters. In terms of the commercial bay office tower, You're right that level 37 has been withdrawn from the tower, but we have obtained lease on level 38.39. Within some of our pre commitment leasing our majors have been given the opportunity to lease slightly more space and then at a certain point they have the election of whether they take up that base or whether they decide not to use it. And we have had in the period, 4000 square meters of additional leasing but going against that, we've had 1500 meters of space, which was under opting to our major pre commitment clients and a couple of them have chosen not to take up space. So the 66% really reflects that. And I think it's important to note that there's very minimal option space left And I think it's an endorsement of the design of the floor plate and the majority of our occupiers are really encouraged by efficiency and the number of people that they're getting on floor through their fit out design. David. Thank you. Your next question comes from Toni Sherlock from Morningstar. Please go ahead. Good morning guys. Just a quick question on the incentives. I think it was $9,300,000 paid. Can you just give me a bit of a breakdown as to where that's occurring? So in sync of generally, in the Auckland market, we haven't really seen much change since our interims. So we're sort of sitting anywhere in that sort of 4% to 6% range on some of our pre commitments with slightly higher than that we're really focused on preserving our effective rents. In Wellington, obviously, the market's quite fluid. So post post quake, we've seen incentives really reduced quite materially, and we have seen some growth in face rent. So if I was to sort of pin an indication on an incentive in Wellington, I'd sort of say, anywhere between sort of 7% 9%. Rather than the 12% plus that we were looking at 6 to 12 months ago. In terms of that figure, that's in our AFFO calculation that really reflects the significant leasing that was completed with the Crown and incentives and leasing fees associated with that. And just those incentives, how are they taken with the crown? And the case of that is largely leasing phase for the crown, leasing around 12 months ago. Okay. Did I take that as fit outs, is it rent free or? Generally speaking, most of our occupiers are taking it, as rent free. And there are a handful that are using it for contribution to fit out. Okay. That's fine. Just on commercial the type of I mean, in the office towers that component there, what type of rental bump should we be thinking about, say, for the retail and for the office side of things? In terms of the office tower, between 2.5% to 3% is pretty typical. And or the retail, a little bit more than that most cases, 3% to 4%. Okay. And then the market resets for those, are they at 5 years, say, for the office? Said how I should think about it? Within the Office Tower, we typically have market reviews occurring maybe sort of midterm on the leases. So, as Scott mentioned, we're expecting an average wealth of around 12 years. So, it varies least delays, but, they'll range from having sort of no market references through to perhaps a megabyte market reference. And usually, those will have a cap and color applied to them. So we have a pretty good level of certainly around the ongoing rental position. Okay. That's fine. Thank you. There was an interesting point that you made about, feet with where rents were in Auckland made it difficult for some developers to get the feasibility to stack up. How do you see that being resolved? Well, it's a really good question. I think what we're seeing at the moment and it's been really well publicized is really quite an unprecedented level of construction activity that's heavily influenced by infrastructure. And our sense is and we're seeing it in the early stages of the, of the election processes, both of the major political parties are committing to more infrastructure in Auckland. So I think the construction market is going to be under quite a lot of pressure in Auckland for quite some time. And I think that will place more pressure on construction costs. And I think honestly we'll see less commercial development because it is very hard to make it stack up, particularly when you overlay additional additional funding costs and the fact that while market rents are growing nicely, I'm not convinced that they're keeping up with economic rents. How it should manifest itself is stronger growth in market rents. And that's what we hope will happen I think that's further reinforced from an affordability perspective too. And then the valuation slide it shows there the PwC rents, which are still slightly below the 2007 levels. And even when you benchmark Oakland to other cities sort of regionally and Internationally, we think rental affordability is still good in this market. So what are your what's just on that same point again, what how are your discussions with your prospective tenants playing out? They're obviously aware of the same information and I'm just surprised that not surprised, but I'm interested is to you'd think that there'd be a rush to push that occupancy up from the current 66% in Commercial Bay, if they see that that's there's a fight for space going forward. Yes, look, we're very comfortable with the demand that we're seeing for commercial buy. As Scott said earlier, we've got around 6000 meters of space currently in negotiation. And I think importantly, we're achieving rental comes, which are at or better than on average 3% better than what we had in our feasibility at the start. So, so very comfortable with how that's progressing. Okay. That's fine. And one final one, just the Deloitte house, that 20 mil it's obviously down from 50.63 years ago. Is that 20 mil assuming that it's being demolished? Is that just purely the land value? No, that does still assume that these value associated with the improvements on the site. It's a really disappointing outcome. What we're finding with the asset is that there are some flaws in how it was constructed, which are not system with how it was designed. It's a thirty year old asset and so we're having to deal with structure now that had some issues. $20,000,000 reflects land value to acknowledge that it's a leasehold have a leasehold interest on that site, but it also reflects some value that's still associated with the existing structure. Okay. So if I said 15.5, would that be a worst case scenario? 15 for the land? Yes. Look, there are thereabouts, there are thereabouts. You could probably pin the value of the land at some between 2015. Your next question comes from Angus Simpson from UBS Investment Bank. Please go ahead. Good morning, Scott and George. Hi, Angus. Thanks. Just three quick questions from me. Just on the resale, the retail lease in Commercial Bay, how has that gone versus budget? Obviously, you've come into the office of 3% At 3% above also Angus. And then I just want to talk around sort of the timing of the convertible note and the reason for doing it now versus taking on cheaper debt the next 4 years in the end of a capital raise 4 years' time? Yes. Look, in terms of the timing, we think the, the pricing that we expect to see on that will be sort of relatively attractive The question as to doing it now as opposed to waiting and doing it in a few years' time, we like to certainly that it gives us We are seeing other opportunities in the portfolio, which, which we covered off in the presentation. We like the flexibility to have this convert to equity in 4 years or alternatively that if we don't need the funding, we can we can repay it. So we think it suits our strategy and also has the benefit that In the meantime, our committed gearing effectively reduces by 5 to 6 percentage points. So again, gives us a better protection of if things turn on worse in the next period. And what sort of premium of a coupon you have to pay over a typical bond typically? What's the increase in margin? Look, I can't get into discussing pricing, Angus given that we haven't yet launched a PDF. Okay. That's right. And then just lastly, just, I guess around the delayed timing of the retail opening. What is what's the delayed time of the opening versus the delayed time of the handover from the lead contractor? That's a good question. I mean, getting into the sort of technicalities of the contracts there are There are access dates, which are the key dates that the contractor needs to adhere to. And that's what we're utilizing in terms of considering the completion of the center. I'd probably have to spend 10 or 15 minutes explaining how all that works in the audience is probably not that keen on that, but suffice to say that the contract is very detailed. There's very clear obligations on the main contractor and us. And it's very clear as to how things will play out in the event that there's a delay. And so we remain very comfortable with the provisions of the contract. And as we've said in the statement today, we don't expect that a delay of this nature will have a material impact on our total project cost. Okay. Thank you. And has there been any sort of major reasons why the delays have been a point in the construction project, which has caused this? Look, I think that it's honestly a question that you'd need to ask the main contractor. To City Center site. So it has some constraints. I think today that they've done a really great job and it's important for us to reiterate that we have a very good relationship with a main contractor and we're working really well together. We've just taken this decision because our independent experts are advising us that the likely timing for completion is is early 'nineteen rather than late 'eighteen. And we want to move early and be proactive. Thanks, Angus. Thank you. Your next question comes from Shane Soley from Harbour Asset Management. Please go ahead. Good morning guys and a great result, great work by the team. So I'm really good. Could you just talk about asset sales and the mix of raising convertible bonds and other debt sources? How does that fit in? Shane, can I ask you to repeat that we're cutting out a little bit? So I couldn't give you a little bit. Sorry. Okay. I'll come back. So you had really good result team has done a good job, so well done. I just got a question about asset sales. How do they fit into the capital structure going forward? Well, I think exit sales remain absolutely under consideration for us. We've got 2 markets that we're in at the moment that we're starting to see some more confidence in the Wellington but post the quake in Wellington last year, naturally, we saw a bunch of investors that became a bit more adverse to that market. So Just interestingly in the last month or 2, we are starting to see more interest down there and we will continue to monitor that. In Auckland, the majority of the real estate that we have remains very core. We wouldn't be necessarily opposed to some sales and having some fractional ownership into and that's something that remains an option for us, particularly if you think about the extent of demand from offshore parties at the moment. And the key thing in that respect really is just making sure that the philosophies and the alignment between us as a listed entity and and whoever a JV partner might be, that is good alignment. So SDS absolutely remain on the cards for us. It's a case of keeping close to the market and really taking opportunities when they present themselves. Thanks, Jeremy. Thank you. There are no further questions at this time. I'll now hand back Mr. Pritchard. Thanks, Amber. And once again, thanks to all of you here taking the time to dial into the call this morning. As we stated during the presentation, we're really pleased with the steps that we've made in the last 12 months and we're really pleased to be where we are following a long period of preparation for this sort of development phase and continuing to progress our strategy. Thanks everybody and we appreciate your support.