Earnings Call: H2 2016

Aug 17, 2016

Thank you for standing by, and welcome to the Precinct Properties Full Year Results Conference Call. All participants are in a listen only mode. There will be a presentation followed by I would now like to hand the conference over to your first speaker today, Mr. Scott Richard, CEO. Please go ahead, sir. Thanks, Anita, and good morning, everybody, and welcome to the 2016 annual result briefing for precinct properties. I'm Scott Frichardo, I'm the Chief Executive of the precinct, and I'm joined today by George Coolford Precinct's Chief Operating Officer. The 2016 financial year has been a significant one for precinct. Over the past 12 months, precincts has moved from a preparatory phase and to a very active phase with development commitments to Vineyard quarter stage 1, Commercial Bay, and more recently, Bowen campus through the government accommodation project. For the 2016 financial period, we are very pleased to announce an after tax profit of 138,200,000 an increase over the comparative period in 2015, close to 13%. The program for today's call is outlined on presentation. I will provide an overview of the highlights of the year before discussing precinct strategy. I will then provide an overview of our major initiative before handing to George to cover off the financial and operational results for the business. On completion of our presentation today, both George and I will be happy take any questions on the call or following the call. Moving to the highlights page. The most obvious highlights of the period are the financial results in which operating earnings have continued to grow and the decision by the business to commit to Commercial Bay, New Zealand's most transformational commercial project. However, a key highlight, which I believe will position the business to execute its next phase, is the growth and capability through the continued strengthening of our team. Cresting now boasts a dedicated team of 11 professionals, development professionals, who are focused on the $1,000,000,000 development pipeline, which currently under construction. This team is well supported by a further team, which is close to 50 strong, having grown the team tenfold over the past 5 years. Through a significant leasing campaign for the investment portfolio and across the development projects, total leasing in the period equaled 135 1000 square meters of space, which is equivalent to the amount of space within our existing Auckland portfolio. And after our balanced date, the unconventional entry by the Crown and precinct for close to 70,000 square meters for Bowen campus and other government assets is particularly satisfying following 3 years of process and negotiations with the government. This outcome results in a significant shift in portfolio in the Wellington market. Finally, but perhaps most importantly, we are progressing our strategy. A strategy that was born 4 years ago is now presenting the business with an opportunity to significantly shift the quality of its assets and grow shareholder wealth. Turning to Section 1 strategy. The extent of activity, which Present currently has, and the opportunity, which these activities presents, were established 4 years prior through taking a long term approach to our business and the assets we own. While looking through the cycle and recognizing the whole of asset costs and returns, we believe we've positioned the business to affect a significant transformation by 2020. This strategy will result in precinct only premium quality real estate in concentrated and strategic locations in each of New Zealand's largest city centers. This strategy has been the driving force behind the decisions made to date and importantly provides the team with the clarity required to progress with certainty. Additionally, the strategy has been from our perspective, clearly communicated to the market through well documented information. Which outlines our portfolio construction as well as 5 year earnings pathways and gearing pathways to give investors as much visibility as possible regarding our strategy. Our view is that this strategy will yield investors with solid growth in earnings and dividends through the deployment of pre funded and committed debt facilities into the highest quality real estate in New Zealand. Turning to page 6. The Image on page 6 is probably the best illustration of our strategy in action. That area highlighted in purple constitutes the newly named Commercial Bay in Auckland. Including the AINS Ed Center, this comprises close 3 hectares of freehold land on Auckland's Waterfront, which on completion of the current works will have a value of around $1,700,000,000. In addition, the Winyard quarter precinct will continue to grow and provides precinct with the last remaining waterfront sites in Auckland for office development. The staged completion of this development ensures that precinct can determine the most appropriate time for development to occur which will be matched by occupied demand. On Page 7, substantial progress continues to be made in advancing our strategy. By 2020, the composition of the pricing portfolio will have dramatically changed. Our weighting to Auckland will increase further to be 75%, while our exposure to the New Zealand government will reduce to around 15%. Importantly, Preston's corporate Wellington portfolio, which is made up of 3 buildings, has now reduced to only 11% of our total portfolio. Partially mitigating the impact of weakness in that market. Precinct city center retail assets will increase from 10% to 17% to the portfolio on completion of Commercial Bay, providing diversity to our earnings and reducing volatility in our earnings. We see the transformation of the portfolio to be significant. Our expectations is that given the reduction in age of the assets, that the maintenance capital expenditure will reduce dramatically, assisting the growth of precincts earnings and importantly, our adjusted funds from operations. Finally, we are considering our options beyond 2020 and are pleased to identify a number of future development opportunities, which exist within the portfolio. The latest stages of Wingard Quarter are well known. However, additional development potential at Bowen Campus and at 1 Queen Street present the business material organic growth potential within the existing opportunity set. Turning to Page 8 Market timing. The impact of the into assets for maintenance purposes, it is very clear to see that investment performance is generally gained at the point of acquisition and timing is critical. By adopting a long term view that focuses on the assets first and capital markets. Our view is that being conscious of the market cycle is critical to asset level outperformance. This chart shows that through our history, we have made some good decisions and we have made some poor decisions. Generally speaking, the poor decisions were made with those that were made when the focus was short term and ignored the mark cycle. Reflecting on this chart provides useful context for us as a management team when looking at our opportunity set and considering where best to place shareholders' capital to generate returns. Turning to Section 2, major initiatives. The first priority in embarking on precincts active strategy was to secure the best people in the market. Since 2018, the management team had grown tenfold the consolidation of management functions and the growth in the team's development capability. Further growing the capability of the team has been a continued focus and has resulted in additional team members. Recent appointments included dedicated project director for Commercial Bay, as well as further retail development and leasing capability given the significance of the Commercial Bay Retail Project. Complementing our team as the consultant team, who we consider to be the best in the market, be it architecture, project management or our main contractors, We believe we have the right people in the right roles and the right partners across each of our developments. Turning to page 11. Considering each of precense developments in parallel provides a useful means to gauge the opportunity the business currently has before it. Commercial Bay, our largest development has now commenced works and is set to provide a yield on cost of 7.5% and a return on cost of close to 20%. While there remains 3 years to go before we are completing this development, we are pleased with the progress to date, particularly the office leasing and retail interest and construction progress so far. Boling Campus Office, the lowers were the lowest return on cost across our developments, reflecting that the project is largely fully leased. However, given that the project is almost fully designed, We have obtained significant cost certainty allowing for a healthy yield on cost of 7.5 percent and the potential for enhanced enhanced return on cost metrics if growth in the valuation occurs. Finally, Vineyard quarter stage 1, which is now over halfway through construction provides precinct with a high quality return profile consisting of an 8% yield on cost, and a return on cost of 15%. Should growth in the FX value of care, precinct does have the potential to secure enhanced returns as further leasing is achieved. Page 12 provides additional insights into the future development potential within the portfolio. Well known to investors of the future stages of Winiard quarter. These stages provide precinct with the opportunity to develop a further 30,000 square meters space over 3 buildings on this waterfront location. Importantly, this opportunity is secured without the requirement to hold the land on balance sheet. Through agreement with the Crown, the residual land at Bowen Campus remains available for future development. The site offers the opportunity for interim yield through car parking and rent from the existing Nx building. This land can be developed for a range of uses, including office, residential, and retail. Another opportunity within the portfolio is 1 Queen Street, while currently occupied, the asset occupies arguably the best site in New Zealand. The existing asset offers around 20,000 square meters of office space and the existing ground first Second Floors are already being integrated into the Commercial Bay Retail Development. Future uses of the 1 Queen Street Building remain open for consideration. Now turning to page 13 and focusing on Black Campus. The Bone Campus site was acquired in 2012 with the expectation that current buildings would provide a healthy yield while a redevelopment could be designed and an occupier could be committed. During this time, the asset has yielded in excess of 10% per annum providing a significant holding income. Following pre commitment by the crown to close to 87% of the office space, the buildings will undergo a material redevelopment with an additional 12,000 square meters of area created. The Crown retains the first right to lease the remaining 4000 odd meters of office space. The following page sets out the scope of works, which are set to occur on the Bowen Campus site. In summary, both assets will be stripped to their existing concrete structure and segmentally strengthened. The Bowen State Building will then have additional structure added to its existing frame to create large 2800 we meet at floor plates over the first six levels. Our new facade will be constructed for each building with new building services installed throughout. On completion, our expectation is that each of these assets will be of a premium quality secured by long term lease to the crown. The following page sets out the time frames and returns for the Boeing Campus development. The existing lease expires on 31 October this year. Following vacant position of the site, LC McGinnis, as main contractor, will take position of the site from 1 November. Based on a 1 November commencement date for construction, we anticipate the buildings to be completed in early 2019 for the crown to occupy with a number of different agencies. LP McGinnett decided a fixed price lump sum contract for the works providing sufficient certainty over present costs. Upon completion of the works in early 2019, the lease will commence for a 15 year period providing significant and high quality cash flows for the period. The lease provides for an annual increase of 1.5% to the passing rink and attempt to market every 6 years with a cap and collar arrangement. Through negotiations, precinct offered in the Crown accepted a structure whereby the Crown leased a minimum area if the Crown leased a minimum area, then they would be eligible for a discount to the market rents of 5%. This is offered in an annual rebate and endures throughout the initial lease term only. Notwithstanding this discount, the yield on cost outlined for Bowen Campus of 7.5% reflects the 5% discount to market rents. Total costs, including all fees, finance costs and construction costs of $203,000,000, with an estimated value on completion of around $230,000,000. This provides for a return on cost of 13%. Importantly, and over the page, The opportunity to develop the remaining land on-site has been retained by precinct. The remaining land consists of 4000 square meters of land, positioned to the south of Bowen State and offers suitable land for a range of uses. Based on its size, a further 25,000 square meters of area can be developed on this site. In the meantime, the site offers the opportunity for good holding income through the in car park structure as well as the existing four thousand square meter annex building, which will become vacant later this year. Now moving to Commercial Bay on Page 17. As outlined in our interim result, precinct committed to the Commercial Bay development in December 2015. Then, works have commenced from the $681,000,000 project with closure of the existing downtown shopping center in May, and demolition now close to being 40% complete. The development will consist of almost 40,000 square meters of premium grade office space as well as 18,000 square meters of retail, providing for around 100 new shops. Leasing progress outlined on page 18 has continued in the past 6 months. Office leasing for the new tower now sits at 60% following the commitment by Minto Allison Rud Watts to around four thousand square meters of space within the mid rise of the new tower. We are delighted with this leasing, which further demonstrates the attractiveness of the location and the quality of the real estate. In completing this transaction, we have relocated Colley's International, a real estate agency firm, into 188 Key Street, capturing a further 2000 square meters of market share. Between winters and colliers, we have attained six thousand meters from outside of the portfolio in the period. We currently have a number of further floors under negotiation and remain confident that the tower will be further progressed in terms of pre leasing over the next 12 months. Page 19 provides an overview of the retail leasing for the center. The commitment by H And M to the center was a major achievement in the period, with H And M committing to a long term lease on-site. Their commitment as our major anchor is a big step forward for the retail complex. Following this announcement, we have received significant unsolicited inquiry for retail space, even though we are yet to formally launch the specialty retail leasing campaign. Importantly, and acting as an additional anchor for the site, discussions with a range of food and beverage retailers continues to progress well. The center will provide a wide variety and significant amount of offerings, and the interest to date is very pleasing. Moving now to Winyard Quarter on page 20. As our most advanced current development, we are delighted with the progress made to date of stage 1 of Winnet quarter. As announced previously, the 1st stage of this development comprises the construction of a new 8500 square meter building 100% leased to AT for 12 years and a major redevelopment of the Mason Brothers Building, a 5000 square meter character building. The project has an estimated cost of around $84,000,000 and is expected to yield 8% on completion once fully leased. Pleasingly, in the period, we leased a further 1500 square meters in Mason Brothers, which takes the entire development to 86% lease. We're pleased to also report that the project remains on time and on budget, with the value on completion being close to $100,000,000 providing for a healthy return on cost in excess of 15%. Construction progress is outlined on Page 21. Preasing appointed Hawkins and ended strong to construct each of the buildings. To date, following 9 months have been on-site, the projects remain Very well advanced with the innovation building now completely out of the ground and the structural steel being erected. The Mason Brothers Building is now watertight with the facade installed and due for completion in December this year. Fid out works for 2 of the occupiers is now underway. There remains an expectation that the building will be close to 100% leased on completion. The future stages of 1 year quarter are outlined on page 22. There remains a further 3 sites available for development providing a further 30,000 square meters of space to be built We remain in dialogue with a range of occupiers for aspects of the future stages. However, any commitment to additional development will require sufficient pre commitment and comfort that additional uncommitted space can be leased. The structure of the development agreement at Winyard Quarter remains appealing to precinct, as we can match potential supply This ensures that additional uncommitted supply is not being introduced into this precinct without sufficient consideration. Page 23 is a very important slide for our business. This slide presents feature precincts current development projects in summary form and outlines clearly the opportunity which precinct has before it. With $968,000,000 of committed development costs, across 3 distinct projects, which provides a blended yield of 7.5%. It is this metric that gives us great confidence about our earnings growth into future. Add to that, our levels of pre commitment for the office developments, which currently sit at 74% across all three developments, We feel that we have de risked a significant amount of the total development risk already. On a blended basis, current development activities will provide a total return on cost of 18%, driving significant growth into precincts NPA. From a quality perspective, while the physical assets, which are under construction, will be of the highest quality, it is the lease terms and tenant covenants, which genuinely reduce the risk and enhance the quality of precense overall business. The committed leases to date provide a WALT of over 13 years which with future leasing is expected to increase Precinct's portfolio, Walt, to greater than 8 years on completion. That brings us to the end of Section 2, and I'll hand over to George to cover the financial and operational results. Thanks, Scott, and good morning all. Page 25 of the presentation sets out our financial performance for the year. Which shows a strong result in line with guidance and with earnings maintained at around $0.06 per share. As shown in the bridge, the net operating income earnings per share for the 2015 2016 financial years. Our revenues are down as a result of asset sales. With the lost revenue largely offset by the corresponding reduction in interest expense. This has further helped by a lower effective tax rate and reduced management fees. Our full year dividend is confirmed at $0.054 per share in line with guidance, This takes our payout ratio for the year to 89.9%, which is the 4th consecutive year we have maintained a payout ratio at or below policy payout level of 90%. Page 26 clearly demonstrates the relevant states of the Auckland and Wellington occupier markets. Auckland has performed strongly benefiting from almost 100% occupancy in the period and showing like for like growth in rentals of 3.1%. Wellington income has declined by 2.7% primarily as a result of longer leasing up periods at Deloitte House and 157 Lantern and King. Pleasingly, Deloitte Heights and 157 Mountain Key are both experienced strong leasing in the period with Deloitte Heights now 100% leased, and 15790 King vacancy, not largely limited to 2 tower floors. Moving to Page 27. Last year, we disclosed our adjusted funds from operations for the first time. And in our annual report this year, we have chosen to increase the prominence of our AFFO disclosures, and to explain how this relates to our dividend policy. Put simply, our dividend policy of distributing 90 percent of net operating income after tax as expected to result and our dividend is generally closely matching AFFO. This is demonstrated by the chart on the right hand side of Page 27, which shows our dividend by Property Council of Australia. Our view is that a dividend policy is aimed to closely match AFFO is appropriate for our business underlines with international best practice. Outside of operating income, financial results were benefited from a substantial revaluation gain of $81,200,000 or 5 percent, and this is set out on Page 28. The Auckland stabilized portfolio has seen a value increase of $79,400,000, offset by a fall of $12,300,000 in Wellington. Plasingly, 1 quarter of our revaluation gain or around $21,000,000 was driven from our developments. With Winyard Stage 1 in particular, resulting in a gain of around $12,000,000 as key milestones were achieved. As set out on Page 28, we are seeing divergent drivers of value growth between London and Auckland. In Auckland, we are seeing strong market rental growth and some continued cap rate compression, both contribute to the solid lifting valuations. For Wellington, the situation is somewhat different with significant cap rates compression, driven by the higher yields and offer in that market, and significantly enhanced lease terms that we have secured through our government leasing, but with this being offset by falling market rentals. The independent value rate assumptions are consistent with what we are seeing in our portfolio, and I will comment further on the market shortly. In terms of the outlook for valuations on Page 29, cap rates in Auckland might set well below peak valuation levels from 2007. While I'm wellington there approaching 2007 levels. However, despite this, we expected cap rate compression in both markets. Will continue to be supported by the low interest rate environment and the attractive spread that exists between investment property yields and interest rates. As shown in the bottom right hand chart, that spread has become even more elevated recently, driven by the lower interest rates post Brexit. Within Auckland, we expect that market rental growth will provide further valuation support as demonstrated by the chart of PwC tower rentals in the bottom left hand corner. Rental levels are approaching previous peak levels. However, based on what we see on the grind, affordability for occupiers remains very good. In part, this is driven by a tendency for occupiers to be using their space much more efficiently than they were 10 years ago. And that rental costs per employee will often therefore be lower. However, it is also a reflection of the buoyant Auckland economy with our occupier is generally optimistic and with expansion ambitions. For Wellington, we believe that the state that the resolution of the Stage 2 government leasing project will provide a good degree of stability to valuations and the government precinct. However, with new supply in the pipeline for the Wellington corporate market, we see some potential further downside risk. We are therefore comfortable that we have reduced our portfolio exposure to that market. Tonight said that around 10% of our committed portfolio value we will consider opportunities to reduce our exposure to the Wellington Corporate market further. Turning to Page 30, this sets out the very solid capital management position we are in. We have $812,000,000 committed, but undrawn bank facilities available, which allows us to fully debt fund all of our committed developments. Importantly, our next debt expiry is nothing from November 2020, and we therefore have no compulsory financing event during our current development phase. We are also very well positioned from a hedging perspective with a good degree of certainty around our funding costs during the next 3 years when we are in the development phase. However, we will benefit from lower interest rates on completion of our developments with less than 50% of our funding costs fixed for the 2020 financial year, which will be the 1st full year of our developments being complete and around 30% being fixed for the 21 financial year. Moving to Page 31. It's been 2 years since we published our long term earnings pathway to demonstrate the earnings growth, which we believe will be achieved as a result of implementing our strategy. In the last 12 months, there have been a number of key milestones achieved, means we are now underway with the line $1,000,000,000 of development. With the leasing we have secured in the period, those developments are now 74% pre committed, providing increased certainty around our future revenues. Combined with the increased cost certainty from having entered construction contracts, We felt it appropriate to now update the earnings pathway. The increased certainty is reflected in the narrowing of the earnings pathway band. For the 2017 2018 financial years, the earnings track is supported by low interest and tax expense, which offset lower net property income from properties being taken into development. However, from the 2019 financial year, Earnings growth is strongly driven by growth and net property income. We have also added the 2021 year to the pathway, which reflects confidence and growth from 2020, following completion of the current committed projects. As set out on Page 32, we have provided guidance for the 2017 financial year, which sits at the top end of the earnings pathway we provided in 2014 at $0.062 per share. While we fully acknowledge that the 2017 forecast has helped by lower interest and tax expense, the leasing activity over the last 12 months gives us a good degree of confidence that the earnings growth we are forecasting is sustainable and will be driven by top line revenue growth. This confidence is reflected in us lifting our dividend guidance for the 2017 year to $5..6 per share. This list of 3.7 percent is the first increase in dividend guidance since 2013, and we believe that as we deliver on our major projects, we will be able to continue to let the dividend in line with our earnings pathway. Moving now to operations and market overview. Page 34 provides an overview of the portfolio and our Auckland portfolio remains in very good shape continuing to be at our Orion fully leased. Missing success at Deloitte Heights State Insurance Tower and 157 Lantern and Key had seen our Wellington occupancy left to set at 96% at balanced day. Moving to Page 35. In addition to our development activities, it has also been a very active period for the stabilized portfolio with around 23,000 square meters of leasing. In Auckland, we have been able to secure very good levels of rental growth through lease renewals and extensions, which were on average 5.9% higher than passing. And market rental reviews, which averaged 11.6% increases over passing levels. And Wellington by contrast, our focus has been on securing occupancy. And to do this, we have been willing to make the market for adjusting rental levels and increasing incentive levels in order to lease space. We believe this is an appropriate strategy given the challenges of future new supply in that market. Page 36 37 demonstrated significant portfolio derisking, which has been achieved during the 2016 year. 135,000 square meters of leasing completed in the period. This has been largely driven through the government leasing, which dealt with a major imminent lease expiry and shifts the portfolio work materially out to 8.2 years. Moving through to Page 38, as announced a couple of weeks ago, I mentioned in the highlights by Scott, the major achievement of the period has been a successful conclusion of the negotiations with the client for the Wellington accommodation project. We believe that the outcomes here are hugely positive for our Wellington portfolio, and are critical to us delivering the portfolio quality shift, which underpinned our strategy. While the client negotiation process was very long, We believe the lease terms that we have agreed in terms of rental levels, length of lease and review mechanisms will provide for our very good investment outcome. The total investment we are making is $213,000,000, which includes $55,000,000 at Pastwell And May Fair Heights and Trinity Terrace. Over on Page 39, Scott has already provided some detail on the Bowen Campus development, but the scope of works being undertaken at the stabilized assets is also significant. The majority of the works will be a pass to a house and night air house with 3 to terrorists largely comprising interior upgrades to meet the Crown's Building Performance classification requirements. Past drill house works include seismic strengthening to 80% of rebuild standard and major base build plant and equipment upgrades. Mayfairhouse will also see full base load plant and equipment upgrades as well as the installation of an additional lift. These works will naturally result in rental void periods, largely during the 20182019 financial years. And these are fully reflected in the updated earnings pathway, which we've detailed earlier in the presentation. Turning to the market overview note, we have set out on page 40 some of the factors which are currently driving the Auckland economy. We see continued strong population growth, underpinning increases in the working age population, as well as driving high levels of investments and construction and infrastructure. These are all important drivers of demand for City Center Office Spice. We believe that not only is the Aucklanded economy performing very well currently, but that the key drivers of investments driven by population growth result on a very positive long term outlook for Auckland. We firmly believe that a growing and successful city will be very supportive of our investments in the city center. Moving to the Auckland market overview on Page 41. Throughout the presentation, we have already touched on the performance of our Auckland portfolio, is indicative of strong market conditions. We are seeing high levels of occupier demand and increasingly seeing businesses struggle to accommodate their growth in their current premises. Conversely, the level of supply being created is low relative to the demand growth and is generally away from the core city center. We are also seeing supply being constrained by stock withdrawals for conversion to residential, as well as office development sites being held for residential development. Additionally, there has been a significant increase in construction costs, and this has actually had a natural break on the construction of new supply, which I will touch on further shortly. For the first time, we have included our high speed on vacancy levels and rental growth, which is shown in the charts on the right hand side on Page 41, compared to the views from CDRA research. In terms of vacancy levels for the open market, we anticipate the current very low levels of vacancy will be maintained. Looking out to 2019, CBRE's forecast is for prime vacancy to increase through this period, but still to remain below historic average levels. Our own view is that vacancy levels will be somewhat tighter and the key difference here compared to CBRA is that, is the CDRE view commercial bay as likely to be around 1 third vacant on completion, and they're being significant vacancy to on our portfolio owned through that 2019 period. Based on our leasing to date, some 3 years out from completion, and the demand profile we are currently seeing, we think that vacancy levels could be lower. Our Bureau line vacancy is reflected in our rental growth forecasts. We consider that 2016 rental growth has probably been constrained by the expectations in the market that there may be significant use of potentially oversupply. As these expectations fade due to much of the nuclear new supply not eventurating, we think market rentals will remain firm. We agree with CBRE that the introduction of new supply in 2019 will likely moderate growth albeit to a lesser degree and that growth will return through 2020. We include on page 42 and a review of the Auckland City Center retail market given its importance to our commercial Bay investment. The City Center retail market is coming off a period of unprecedented growth and retail rents, driven by very strong demand for Cbd retail locations. From existing and new entrant retailers. This is consistent with the levels of interest we are seeing in commercial planning. As said, item, page 43, the Wellington Office market continues to have a number of challenges. While overall, members of Wellington based government employees appear to be on the rise, this is being offset by the consolidation of office accommodation requirements. This should result in a fairly stable outlook for well located buildings in the government precinct, which matched the crimes requirements. Demand from corporate occupiers remains flat in a market where there is new premium supply in the pipeline. We see this as leading to elevated vacancy levels and some rental reductions over the next few years. However, our view is our rental levels of already adjusting downwards in anticipation of the new supply. As a result, we expect deeper falls to rentals in the short term, and less of an impact for other rights compared to CBRE's view. Finally, on Page 44, and before I hand back to Scott, As I mentioned before, we see that there's currently a natural break to new supply being created from market rental levels failing to keep pace with increasing land values and increase in construction costs. There are a number of factors driving demand for construction and leading to inflation, including the large scale projects underway at Commercial Bay, and the International Convention Center, as well as the City ValLink and the large number of Apartment construction projects. This analysis analysis indicates that it will become increasingly less feasible for new supply to be created in the office market, which we expect limit the extent of new supply we see in the next few years. I'll now hand you back to Scott to conclude the presentation. Thanks, George. And just turning to pages 4647 for some concluding comments. While global uncertainty remains, the New Zealand Economy continues to outperform its global counterparts through strong population growth and significant investment in private and public capital projects. In particular, the commitments being made by central and local government into major infrastructure projects will ensure that New Zealand and, in particular, the Auckland economy will continue to perform well into the future. The markets which precinct participate in are extremely divergent at present. The Auckland market remains very robust with continued growth in employees and elevated interest in the investment market. And while the investment market in Wellington is improving, The corporate occupier market remains precinct's biggest challenge. We are pleased to have reduced our exposure to this market through sales of 3 corporate assets over the past 18 months. In terms of the outlook for precinct, we believe we are very well positioned. We believe in our strategy, and are confident that it will deliver for shareholders. We think our timing is good and are pleased to have a capable team in house a capable team of consultants, advisors and contractors. Precinct is well planned. We established a long term plan many years ago and are sticking to our plan. This has involved long term thinking in taking considered steps, which are consistent with the plan. We feel good about questions. The first question today comes from Angus Simpson with UBS. Please go ahead. Good morning. Hi, guys. Just a couple of how's it going? Just a couple of questions from me. Just quickly on the pre commitment, commercial guide, is there any new tenants or is that just meant it's taking more than what was originally thought, when the 52% pre commitment came out? No, it's just meant to take in these boats. Okay. So this is after the inventory is simply the movement from 52 to 60? Correct. Perfect. And just quickly on, the Wellington. So I guess the Wellington corporate assets are probably the only sort of I guess, risk at the moment. And you mentioned potentially selling some, could you sort of outline the strategy there around timing and I do see just a bit more color on that? Look, at the moment, we own state insurance to our Vodafone on the key and the Deloitte buildings, there are 3 corporate assets. One of those still has a couple of floors that are vacant and so I think ideally for us If we wanted to sell that particular asset, we'd want to look to try and achieve 100% occupancy and a good long term on the other two assets, it's really just about timing and lot size. So we've seen certainly good activity levels in that market. I think those assets that have, full occupancy and long term leases are the are the assets that have been sort of well rewarded in terms of pricing. So it's about sort of positioning the asset to meet that demand profile. And look, at the moment, we're comfortable with our gearing. We're comfortable with our certainty around the costs on our projects and we're certainly comfortable with the valuation outlook. So, gearing is not really a driver. It's around the appropriate timing to exit an asset if we don't think there'll be a lot of future total return growth. And just lastly, just on your internal, vacancy forecast, does that assume, HSBC coming out of stock, or does that assume that it's leased up as well? No, that assumes that it remains leased. Okay, very good. That's all I had. Thanks guys. Thanks, Angus. The next question comes from Erne Bachelors with First NZ Capital. Please go ahead. Good day, guys. Well done on a solid result. Things look to be progressing pretty well. Thanks for disclosing AFFO for a second time. Just on your maintenance CapEx, what's the reason behind the uplift from FY15, FY15 looks like it's gone from 2.6 and FY15 to 6.4 and FY16. And where do you expect that maintenance CapEx to sit in FY17? Yes, sure. I'll answer the first, but, and George can answer the second, but In terms of that uplift, it's mainly attributable to State Insurance Care. We've had to fund some pretty large capital grades the year around the mechanical services in that building, in particular, and that's driven a large part of that increase. In terms of next year, slightly less than this year. We've got some upgrade works happening, and Wellington assets, but, similar level probably to the current year, as well as AMP Center and an alternative to the upgrade and a couple of other items, works around the living there. All right. Thanks. And just on your FY 2017 lease event composition, so you've got 21% being market reviews. You give us a split of that 21% between Auckland and Wellington? And, underwriting in the portfolio is 3.6%. So you've got Aucklanded at 6.6% under rent in the Wellington market. Now given the high proportion of fixed and CPI linked leases in FY 2017, do you still expect a level of underwriting an Auckland portfolio to widen over the near term? In terms of the I'll come back to you with the detail on the split between Auckland and Wellington for those market reviews. But there is a relatively light number of market reviews in the 2017 year. So we do expect that the Auckland underwriting position will widen over the next period. Okay, cool. Thanks. And lastly, did you disclose Mentor's lease term at Commercial Bay? We haven't disclosed the lease term now. It's a long lease term, consistent with recently done there in the pre commitment phase. Okay, thanks. That's all. Thank you. Thanks, Alan. The next question comes from Toni Shoak with Morningstar. Please go ahead. Good morning, guys. Just a quick question on the, on the Bowen Campus lease. I understand that was 5% below market with 1.5% annual bumps. Does that mean that that first rental reset in 6 years, it can theoretically move all the way up to market rate, presumably given that obviously constrained by that cap, that 10% collar? No. So that 5% reduction to market wins endured throughout the initial lease term of 15 years. So, so when we hit that first review in year 6, there'll be a market test, then we'll be set at 5% below that mark it rent. That's, of course, on the basis that they're continuing to lease their minimum requirement. Okay. All right. That's right. And you say take, I think you mentioned this, they've got options on the routes for further space. Is that on the same terms as this? Yes, it is. Yes, it is. And there's a period of time, for that first right. And look, it's yet to be determined, but our expectation is that, they will consider that space pretty closely when it becomes available. Okay. Just on jumping back to Auckland now, just on your base assumptions for, I suppose, square meter absorption, Do you have a number that you're thinking at for the next 2 or 3 years for the amount of absorption that you're expecting for Auckland? And over the long term, it continually runs at around 20,000 meters of absorption a year. But that fluctuates depending on the cycle. We've seen it being slightly elevated in the last couple of years. And based on the demand and the sheer amount of negotiations that we're in at the moment, we see it being elevated for the next couple of years also. And when you say elevated, what that's midtways? Look, I think you find that there'll be a constraint around the ability to have that absorption because there might be a supply to be absorbed on that on a net basis. But we expect that supply created on the absorbed in the next couple of years. It's still on Auckland. Just during the call, your you mentioned that the motor supply didn't eventuate. What's your view on that? Do you think that's and then you also at the same time said cost escalation is a factor. Is that why you see supply actually not coming to the market because of that cost escalation? So probably the first part of that question, there are 2 sites, but within the city center, within the core city center that, have been discussed for major office cars, at the same period as we were looking to pre commit commercial base. One of those sites has since been taken to the market and doesn't appear to be currently actively pursuing office development on that site. The other site has currently got retail use on it. And we expect would only proceed with a significant pre commitment. So those would be the 2 we'll be referring to as supply, which was anticipated, which We expect we'll eventually add at some point in the future, but isn't currently active. In terms of construction cost escalation, we're absolutely seeing that coming through in the market in terms of, in terms of pricing just driven by this year volume of work that's underway currently. So the ex your Commercial Bay Development, does your contractor have a rise in fall provision? Now we've got a guaranteed maximum price construction contract at the commercial bank. And So we're insulated from that construction cost increases. Tony, we have either GMP or fixed price across all three projects. So we are integrated from escalation at the moment. I would say if we took any of those projects to market now to seek pricing, that pricing would be somewhere between minimum of 5 and perhaps slightly north of 10% higher than with the pricing that we received. Okay. That was just for tourists then. I know you mentioned, cycle, the timing of your returns is heavily driven by investment in the cycle. Are you when it how are you positioning yourselves for the cycle to come off and when do you think it's going to come off? To be honest, I'm not convinced everyone can pick cycles, particularly the interest rate cycle, but what's your how are you are you curtailing your investments at the end of 'eighteen, 'nineteen or waiting to see what happens at that point? Good question, Tony. We have a view, Well, there's a one view on the market that cycles run-in 7 years 7 years is coming up shortly in which case the market might come off. We don't believe in that view whatsoever. Take a slightly more sophisticated view than that. We think interest rates are going to remain lower for longer, which will support asset values, and we see that persisting through the next 2 or 3 years, but I'm not in this business that's an interest rate specialist. We are seeing really strong levels of growth in employee numbers in the Auckland Cbd. In the last three years, we've seen the growth in MPE numbers of around 20%. And based on the discussions we're having with our occupiers, it doesn't seem to be any abatement in that growth, and large majority of our businesses that are occupying our space need more space. Would we jump into another $500,000,000 development right now and sort of commence construction in the news time? Probably not, we'd be a little bit more cautious, which is sort of a balanced approach between considering how much we have on right now. And also where we are in the cycle, but we do feel comfortable that we've got completed developments occurring from December this year, which is when the 1st part of stage 1, when the ad completes. And all in completions in mid-nineteen feels good to us. And final question, just on the commercial bay if you're trying to shoehorn tenants in for that remaining 40% to what extent is the delta in outgoings for commercial for the commercial bay office compared to what they would be in their legacy buildings. Obviously, it's different, but Is there is the delta there significant? Yes. Well, I mean, look, we've got a, a really detailed outgoing budget. We know that relative to 2 other premium assets that are outside of our portfolio, we're somewhere between 10% 15% below. Which helps us in terms of our net rents, relative to some of our existing buildings like the existing PwC tower, were sort of broadly in line, but that's only on account of some pretty large savings in our outbound loan that have been achieved in the last few years. So got pretty good visibility on it. And, in terms of our competitive advantage, it has helped us slightly in terms of attracting new market share. But the variability in the rents versus the PWC tower what order of magnitude are we talking? This is on an all in basis, including incentives. Would we be talking about On a net effective basis, we're probably around 10%. It seems that we've achieved for the majority of PWC's existing space, which is now largely leased, we've seen growth on passing rents and some quite nice growth. I'm sorry, just one terminology in your in your result pack, the 5.9 percent, is that rent on rent extension, rent on rent and were 5% higher than passing. Can you just those type of is that a year on year escalation that you're getting? I'm not sure exactly what that metric is. Probably the best way to look at it is, the market rent review line where we've achieved on average 11.6 percent nominal growth, and they'll come off a 2 or 3 year cycle, generally 3. And that suggests that over the last 2 or 3 years, we're running that sort of 4% growth. And that's I think that number really confirms the growth that we've had within the portfolio in the last few years, and it's good to see that emerge obviously. Okay. Thank you. That's it for me. Thanks, John. Thank you. The next question comes from Matt Peake with Craig's Investment Partners. Please go ahead. Hi guys. Congratulations on the progress today. Just one question about some of the sort of lease events that you've got with the expiries coming up this year. Obviously, you've had some strong interest from tenants to move into the new assets like Commercial Bay and Colliers sort of upgrading Sort of how do you view some of the expiries coming up in terms of where those clients are likely to be retained or whether you're sort of going to need to fight to keep them, with other potential other opportunities for them out there? Well, I think, I mean, look, we've got a couple of floors coming back and AIM did, you know, in the next the next 12 months. And, negotiations are already underway for someone to take that space. And, and so we feel confident about that. We've got some expiries in the existing HSBC building. And look, we are considering our options there in terms of whether we take the opportunity there to reinvest back into that asset, and reposition it while we can or whether we look to just release it and keep holding that asset on a passive basis. In terms of the retaining clients within Auckland, we're getting really strong engagement and are able to offer a range of price points. So we came to be doing reasonably well and we're pretty comfortable with the expiry profile. In Wellington, it is a bit more challenging. And as George said in the presentation, we're quite happy to frankly lead the market and be aggressive and maintain occupancy, which is what we're doing. And when the entire Wellington Corporate portfolio is only 10% of our portfolio, then we're able to do that and the consequences are not too bad and we maintain cash flow, which is what our focus is. Yes. Yes. And then just in terms of, obviously there's sort of $300,000,000 of capital potentially in new projects And the committed gearing levels now 39% acknowledging that those opportunities aren't going to necessarily play out for a few years. I guess to the extent they come out how aggressive will you look to be in terms of recycling some of those maybe some of those Wellington corporate assets versus the other opportunities that you have there in terms of, I don't know, raising equity or potentially other structures? We'll be looking at on a forward looking basis, what the total return outlook looks like for each of our assets. And what we've seen at the moment probably our corporate Wellington Essex is looking the most challenging. So to the extent that we can recycle capital from 1 or 2 of those assets into 1 or 2 of those potential opportunities down the track, then that seems to us to be quite a good use of use of capital. But as you say, I mean, any advancement on any of those existing organic opportunities is really going to be market and demand lead. But we feel like we feel comfortable with our committed gearing, and we feel like we've got capacity within the existing portfolio to be able to fund any future opportunities. You. The next question comes from Rohan Coleman Smith with Goldman Sachs. Please go ahead. Hi guys. Congratulations on the result. I'm just one really quick question. When you highlighted the total returns that you're expecting from your development, I think you had 19% for Commercial Bay, does that exclude the development fees that fundraising change in the management contract? No, that's a return on cost metric and it includes, includes fees. So that's before any fees required to be paid? No, it's post fee. So fees are considered as a cost for the feasibility. Okay. Thank you. Thanks, Ron. Thank you. There are no further questions at this time. I'll hand back to Mr. Priscard for any closing remarks. Thanks, Mitra. And look, thanks, everybody, for dialing in. Long presentation today. So thanks for bearing with us there's a lot going on within our business. And so it's great to get an opportunity to be able to let you all know where we're at and what we're up to and how we're thinking. So Thanks for your support. We genuinely appreciate it. Cheers. That does conclude our conference for today. Thank you for your attendance. You may now disconnect your line.