Good morning and welcome to the Stoneweg Europe Stapled Trust third quarter business update. We will begin with remarks from the CEO of the manager, Simon Garing, followed by Q&A. During Q&A, please click the raise hand button to be placed in the virtual queue. Alternatively, you can submit text questions via the Q&A feature. Now I will hand across to the CEO of the manager of the Stoneweg Europe Stapled Trust, Simon Garing. Simon, over to you.
Thanks, Chiara, and good morning, and thank you for joining us today for the Stoneweg Europe Stapled Trust, or SERT for short. Our third quarter briefing for this year. The photo montage highlights a selection of SERT's assets, typically large, well-located logistics and light industrial properties and Grade A office buildings. These range from core to value add type, demonstrating our barbell approach to portfolio construction. We continue to execute on our stated investment strategy of pivoting further to logistics and data centers. We are focused on core Western European markets and the Nordics, which together represent 86% of our current portfolio. As a reminder, almost 93% of SERT's portfolio is held under freehold title, and nearly all leases feature inflation-linked rent escalators or indexation supporting steady annual income growth.
We announced a couple of months ago that we continue our pivot towards logistics, light industrial, and data centers, now targeting to be 70% by 2027. We plan to achieve this through further divestments of office and other assets and through reinvestments into logistics, while the investment in AiOnX, our data center development fund, will also grow through the development cycle. We will also move to a greater weighting to Western Europe and concentrate in our existing key gateway cities. Plus, we continue to review our sponsors' pipeline in Switzerland and Spain. Why is this pivot important? Industrial REITs generate higher cash flow per dollar of investment than office buildings.
Cap rates tend to be higher and generate higher distribution yields, supported by a number of key themes in logistics of e-commerce, digital infrastructure demand, and onshoring of supply chains, reflected in the high multiples to NAV on the stock market. Underpinning SERT's strong asset quality is the strength of our tenant roster, with around 800 tenant customers and more than 1,000 leases, with a long WALE of over five years. The top 10 tenant customers account for only 20% of the total headline rent, with no single tenant exceeding 4%. This limits concentration risk across almost 1.7 million sq m of NLA. Over 90% of our tenants are large multinationals or government-related entities, providing a strong credit profile during periods of economic uncertainty. That is reflected in our low levels of arrears and high cash collection rates.
The portfolio is assessed to be approximately 7% under rented to today's market rents by our recent valuations. Underlying market rent growth is evident in both logistics and office markets, supporting recent valuation uplifts. Page six highlights some of the key awards in the third quarter, including two awards at the latest Asian Corporate Governance Awards, both being nominated as a top five publicly listed company in Singapore and within the top 50 in all of Asia. We also achieved a GRESB four-star rating for the third consecutive year and 85 points from GRESB. We also hold an MSCI ESG A rating, one of the few in Singapore to do so. Now onto the third quarter financial and operating performance highlights. The portfolio results are outstanding in a benign environment.
Like-for-like NPI continued to grow at 5.9% for the three months, driven by a 7.6% positive rent reversion, almost equal to the 11% that we've demonstrated over the full year. We also, in the quarter, lifted occupancy 110 basis points to 93.5%. Combined with substantial 97,000 sq m of leasing, which is around 5% of the total portfolio in one quarter. This continued our trend of improving financials. The year-to-date decline in distributable income is now only 4.6% lower than PCP after this very strong third quarter, which reflects the negative headwinds from the previous higher financing costs now being behind us. With our unit buyback recently, the decline in DPU will be even less than the decline in the overall distribution income, being less units on issue.
We are also pleased to announce that Fitch, during the quarter, raised its credit rating on SERT to BBB with a stable outlook, which enabled us to reset SERT's debt for a longer duration and lower costs. I will present a slide shortly that will show the fortress state of our balance sheet, including an almost six-year weighted average debt duration. We will also close on EUR 105 million of asset sales imminently, which will reduce gearing to 39.1%, from which we will commence to reinvest. Modestly in 2026. These recent sales complete the EUR 400 million sales program that we started out in 2022. I am pleased we were able to achieve these sales in total at an 11% premium to their valuations, crystalizing over EUR 41 million of gains.
Slide eight shows the pickup in the portfolio occupancy due to this active leasing in the quarter and the disposal of a higher risk asset in Gdańsk in Poland during the period, again at a slight premium to book value. The long WALE of 5.1 years continues to provide cash flow resilience and visibility. We have already de-risked over 70% of the leases expiring until March next year, again providing us very good visibility into 2026. The next slide provides the key highlights from Fitch's recent rating upgrade report. Fitch pointed to the improving quality of the portfolio from recycling assets into our AEIs and the steady leverage with sufficient headroom on Fitch's financial KPIs, such as leverage and interest cover. This is the prime chart of today's presentation.
have undertaken a remarkable amount of refinancing on the back of the recent investment grade upgrade to deliver tangible future benefits to SERT. This chart reflects our new pro forma debt profile following the imminent asset sales and our recent refinancing activities. Firstly, we have no debt maturing until 2030. No debt maturing until 2030. Following the successful EUR 300 million seven-year green bond in October and the refinancing of all of our 2026 and 2027 expiries. This was done also with two new bank facilities. One is secured against HUG Support development project, and the second is an unsecured loan extension for five years, previously maturing in 2026, which has now got credit committee approval and is in final stages of documentation, which we will complete again shortly. This is taken into account in this chart.
Secondly, we have entered into a five-year fixed to floating swap on EUR 300 million to take advantage of the lower ECB rates. We now have 56% of SERT's debt exposed to fixed rates, down from 86% in June, enabling SERT to benefit from further potential rate cuts, while any upside risk to rates is protected with interest caps that we've acquired. To protect us on the upside for the next two years against this floating debt profile. Overall, our capital management of recent months will deliver 30-40 basis point savings in margins and lower finance costs in the following years.
As an example, the 2033 green bond was issued at a 20 basis point lower margin than the 2031 bond that we did in January, and with two more years longer duration, while the new bank loan margins are materially lower to the previous margins of the facilities that they are replacing. Again, fortress shape. In June, SERT made a strategic EUR 50 million investment in AiOnX, representing a 6.7% stake in our sponsor's Pan-European Data Center Development Fund. This fund has already secured 1.446 GW or 1,446 MW of capacity across five projects, with a clear path to expand to approximately two gigawatts over the coming period. Construction has already commenced in Dublin for the first 32 MW data center, which is fully pre-leased to a major U.S. hyperscaler. This underscores both the quality of the counterparties and the immediate commercial traction of the platform.
I'm also pleased to say that the other four sites have made positive progress in the various stages of the development processes. For example, the Madrid site is on track to secure the planning permission, while Varde in Denmark, Milan, and Cambridge sites have all successfully secured the full target power capacity. Collectively, these five sites position AiOnX as one of Europe's most significant hyperscale data center development platforms, with distinct early mover advantages, given that this fund has been together for four or five years already to achieve significant value accretion on these development programs. Construction loan facilities have also been arranged for each project, subject to pre-leasing. We do not expect much equity required from SERT will be needed to fund these projects.
As SERT is the only Singapore REIT to provide investors with material data center developments, we thought today we would provide analysts and investors with some general industry rules of thumb to assist you to understand the current potential. Slide 12 shows an example for potential returns on developments in Europe. According to our independent valuation report from JLL as of May, as well as other industry benchmarks and public presentations from European developers, the net gross development value for modern European data centers is estimated to be approximately EUR 18 million per megawatt of IT power capacity. Against development costs of roughly EUR 11 million per megawatt of IT power capacity, this represents a valuation gain before tax and fees of roughly EUR 7 million per megawatt of IT capacity. Delivering with approximately 1.5 m illion worth of rent per annum per megawatt, approximately 12%-15% of net stabilized income yield on the development costs, 12%-15% net stabilized income yield on development costs. That represents a much higher yield than the valuation currently around that 5%-5.5% yield level. That is what is driving the development profit. Assuming seed equity in this example of EUR 500 million, there is potential for over 10x equity multiple. As a reminder, AiOnX will shortly have two gigawatts of power, of which we own 6.7% currently. I am pleased to introduce you now to Hui Chen, our Head of Finance. Hui Chen is the woman behind the numbers, managing SERT's accounts for the past six years. I will hand over now to Hui Chen to take you through our financial and capital management. Thank you.
Thank you, Simon. Good morning, everyone.
I'm pleased to report that for the nine months, our net property income was 3% higher than the prior corresponding period, mainly due to higher income from certain assets, such as Nervesa 21, following the completion of its development. As Simon just mentioned, NPI on a like-for-like basis was EUR 5.2 million, or 5.3% higher than the prior corresponding period, with logistics like industrial up by 7.3%, office up by 2.2%, and other sector was 21.3% higher due to higher turnover rent received in Star hotels Grand Milan. Net interest cost was up 27% due to a higher all-in interest rate of 3.9% for the period, compared to a lower 3.22% in the prior corresponding period. However, the interest rate as of September was slightly lower at 3.93% compared to 3.97% in June. While unaudited distributable income is down 4.6% for the nine months on the prior corresponding period.
This was a very strong quarter, helping to claw back some of the larger declines in the first half of 2025, which was down 7.3% on the prior corresponding period. For the third quarter, distributable income was up 17.2% as compared to the second quarter, due to rising rents and approximately EUR 2 million in one-off income. In October, we acquired an additional EUR 2.1 million securities at an average price of EUR 1.51 per security, taking total securities in issue to EUR 558 million. This is accretive to both distribution per security and NAV per security. Now turning to slide 15. As at September 2025, SERT remained comfortably within all bond and loan facility covenants and within the credit rating agency's metrics for an investment grade rating. Interest coverage ratio is 3.1 x on a trailing 12-month basis, calculated based on the definition in SERT's EMTN program.
This is impacted by the normalization of interest rates, as mentioned earlier, but the ICR remains well above our covenants, rating metrics, and MAS limits. Given all the refinancing activity over the past few weeks, slide 15 also shows we expect net gearing to drop to 39.1% from imminent asset sales, which will partly be used to pay down the EUR 37 million drawn from the RCF. We have refinanced all of SERT's debt over the past 12 months on lower margins with substantially longer maturities. With an undrawn EUR 200 million RCF and an additional EUR 50 million cash from asset sales, we have ample liquidity going into next year. We are comfortable with net gearing towards the top end of our range. We are pleased that our NAV remains above EUR 2.01 per security, or EUR 2.16 per security as per APRA's guidelines of adding back.
Deferred capital gain tax, which can be typically passed on to the buyers in Europe and is not paid for by SERT's security holders. Now I will pass to Elena to share key highlights about the portfolio and asset management.
Thanks, Hui Chen. Starting with the portfolio performance to date, the occupancy trend lines in the chart on the left show that overall occupancy increased 110 basis points over the past three months. This was mostly driven by leasing in Paris, across our Dutch portfolio, and the divestment of a weaker office asset in Gdańsk that Simon mentioned earlier. Our core Western Europe portfolio's occupancy was 94.5%, thanks to strong leasing activity. Occupancy in Central Europe was at 88%, with limited office leasing in the quarter.
The chart on the right reflects the relative size of each country and, amongst others, shows the lower materiality of Poland and Finland to the overall portfolio. Turning to the logistics and light industrial sector specifically, portfolio occupancy was up 80 basis points to 95.2% over the quarter. This is very much in line with the target of 95% that we have set for ourselves for year-end. Turning to the third quarter specifically in more detail, we signed significant 93,000 sq m of leases, of which approximately 7.5%, which represents approximately 7.5% of the logistics and light industrial portfolio. This is on top of the 77,000 sq m of leases that were already secured in the first six months. In 3Q, we achieved 10.6% positive rent reversion, with the year-to-date rent reversion positive at 9%.
The logistics subsector has been stronger year-to-date, with rent reversion at 11%, while the light industrial subsector was at 6.5%. Incentives in the sector are inching up but remain very low. Tenants are more inclined today to renew than to relocate on expiry, as they seek to avoid costly relocation and new fit-out costs. The portfolio is still under-rented, and valuers are estimating passing rates at about 6% below ERV. Turning to slide 20, you can see here that according to a recent report by Savills, Germany and France are the top two markets where occupiers are expecting to take more space in the coming three months. Part of this demand will be driven by modernization programs. Important freight hubs and ports in Spain, Italy, Belgium, and the Netherlands continue to attract more interest, with Czechia benefiting from onshoring of supply chains.
All this bodes very well for our portfolio. Also, from the same report on slide 21, you can see that given the geopolitical volatility, defense spending in Europe is entering a new cycle as European states spend more on defense. As a result, manufacturing and logistics sectors are expected to expand significantly to support new defense supply chain. Savills estimates that Europe may need an additional 37 million sq m of new space over the next seven years, while the U.K.'s demand could rise up to 3 million sq m. Lastly, on this sector, the key leases signed in the quarter were in Germany. The first one was a 10-year lease renewal to a single tenant for over 30,000 sq m in Sangerhausen at 28% positive rent reversion.
The team also renewed a 12,000 sq m lease at one of our multi-let assets near Stuttgart at 11% positive rent reversion. Turning to the office portfolio. Overall occupancy there rose by 200 basis points in the third quarter to 88.2%. The 6,500 sq m 10-year lease with a Danish tech company at HUG Support took effect in the third quarter, and this improved the Dutch occupancy rate by 360 basis points. The recent divestment of our Gdańsk office asset, which was less than 50% occupied, boosted the Polish portfolio occupancy by 360 basis points as well. In Finland, a lease expiry of 2,100 sq m in Murinaitie reduced the Finnish occupancy rate by 310 basis points to 70%. The Finnish portfolio is now yielding 10%, even as passing yields in our Finnish assets remain strong at over 8%.
This gives us the flexibility to hold for a medium-term exit at the best achievable price. In the first nine months, office activity was approximately 77,000 sq m in leasing, with most of the leasing, or 73,000 sq m, completed in the first half of the year. The year-to-date rent reversion achieved was 12.5%, 9.1% higher versus PCP. Other than the major new lease in HUG Support that took effect in 3Q, there was minimal office leasing in the quarter. Overall, the office portfolio remains 8% under-rented. We continue to focus on securing long-term leases and higher rents, strengthening the portfolio's income profile over time. Broader European office sector trends are consistent with the trends observed in our portfolio. Recent CBRE data shows investor interest in CBD offices rising strongly, up between 29%-47% year-to-year. This has been driven by healthier tenant demand, recovering occupancy, and stable vacancy rates.
Despite some uncertainty around U.S. tariffs, prime office yields have remained stable across markets, with expectations for up to 25 basis points yield compression in 2025 in many European locations. Confidence is also returning to the lending market. Lenders are increasingly comfortable financing prime European office assets, as reflected in lower ongoing debt costs and higher LTV ratios, rising from the previous 50% - 60%. For my last slide, before I hand over to Simon, while space in central location offices is still in high demand, the change in rental growth is moderating due to affordability constraints and an increase in new supply. This shift results in asset owners redeveloping or repositioning older assets. Since 2022, SERT has divested over EUR 200 million in non-core assets.
Simon, over back to you.
Thanks, Elena.
I'd be remiss also not to congratulate you on this call for your recent promotion to Chief Capital Markets Officer in Investor Relations. You couldn't have started your new gig with such success. Congratulations again. Thank you. Turning to our strategic priorities for the short to medium term. Firstly, we continue to enhance the portfolio and pivot to the 70% target of logistics, light industrial, and data centers. Our local Stoneweg teams are actively managing the assets to retain high KPIs across the portfolio, including delivering strong NPI growth from high rent reversion and indexation. We continue to drive occupancy higher and maintain long-term lease duration for earnings visibility and resilience to support the higher DPU currently of 8.5%. Secondly, we are focused on our balance sheet strength.
With almost six years of WAID and stable asset value, we are comfortable to be at 40% net gearing over the medium term. We continue to selectively sell non-core assets to maximize value and reduce risk in the portfolio and provide liquidity to build our AEI and development programs. The rating agencies reflect well on our capital management strengths and track record, with Fitch's recent rating upgrade a rare outcome in this benign macro climate. Thirdly, our recent EUR 50 million investment in AiOnX via the new business trust is designed to provide you, the investors, with substantial gains to complement the REIT's stable and resilient yield. We have shown you industry rules of thumb to help you bridge to the substantial equity multiple potentials and capital gains on this investment based on today's environment. We are making good progress also with planning approvals for our two major Dutch projects.
In conclusion, this year has been a very successful transition year from Cromwell to Stoneweg. We have continued to put in place the building blocks for future DPU and NAV growth and to drive overall returns for investors. I am most pleased that we have also refinanced all of the debt in the last 12 months for lower cost and longer duration, benefiting from Stoneweg's European networks. We are well positioned to deliver sustainable returns and long-term value for investors. Thank you for your investment and trust in us, the management team, and the sponsor. Chiara, over to you to see if there are any questions. Thank you.
Thank you very much, Simon. We will now begin the Q&A session. As a reminder, to ask a question, please select the raise hand button to be placed in the virtual queue.
For those of you who have dialed in, please select star nine to raise your hand and star six to mute or unmute. Alternatively, you can submit text questions via the Q&A feature. Both of these options can be found at the bottom of your Zoom screens. Our first question comes from Joel. Joel, please unmute yourself to ask your question.
Hi, can you hear me?
Good morning, Joel. How are you?
Hi. Good, good. Congratulations on your result, and particularly your credit upgrade and debt activity.
Thank you.
Yes. Okay. A couple of questions from me. The first question is on divestment. On your slide four, I understand there's some targeted reconstitution. This would be completed by end 2027. Is that correct?
The EUR 105 million that we've mentioned today is due imminently. That means weeks, not years.
Oh, okay.
Actually, it's by 2027, but it could happen a lot sooner.
Yeah, I mean, we have to be careful. My compliance team is saying we have to be careful on forward guidance. Again, weeks, not years.
Okay. Got it, got it. I was just wondering whether there's other activity you plan to sell. I mean, it looks like.
Okay. Yeah. Look, there's two things, right? There's two things. The first is we always recycle assets. As a very active asset management company, we like to add value to assets. In some parts of that particular asset cycle, we've maximized the value for that asset. We have a very thorough 13 risk factor matrix model that we assess each asset from a hold-sell position. If the expected returns have peaked.
The risk is relatively benign, then that is an asset that we will sell to then potentially move that into other assets or other developments. When we set out in 2022 with a EUR 400 million sales program, that was more targeted at the balance sheet during the rise in interest rates, which obviously caused the valuation cycle to turn. Now the ECB has been in rate cutting for the last 12 months. We are clearly seeing cap rates decline, and we're seeing valuations now start to increase. We're pleased that we've now, within weeks, completed that EUR 400 million sales program. That is that large chunk of what we needed to do. Over the next few years, there's always going to be some element of recycling. It's not going to be that material because we will phase it through our CapEx cycle.
For example, we have two development projects in the Netherlands, which we expect to kickstart next year. That totals around EUR 160 million to be invested over a three-year development cycle. You could imagine that there will be sort of EUR 30 million-EUR 40 million of asset sales over the next three years per annum to fund that. More accretive and more value-enhancing development program. Two-part answer to your question.
Great. Okay. Very comprehensive. I was just wondering because I saw that you have a hotel in Italy. Is that correct?
That's correct.
Yeah. I think it performed quite well recently. It's, I mean, comparing logistics and office and suddenly one small part there. What's the long-term thinking for this hotel?
Yeah. This was a legacy asset at the time of the IPO when we bought. We had 74 assets through a number of p ortfolios, including an Italian portfolio. In that Italian portfolio, it had a number of non-logistics, non-office buildings, including a tax office, police, campus, which we've disposed of. It also included an excellent 250 room hotel near Malpensa Airport, the main international airport of Italy. That, as you've rightly highlighted, is performing exceptionally well. We have a fixed lease with the operator, and in that lease, we have turnover rent. That is what's been driving the other category. I think Hui Chen mentioned that that particular property is up, what, about 20%-21% from an income perspective year on year. That does not mean, Joel, that we're going to go out and buy more hotels, if that's the inference to your question. We're very happy with this one.
It's certainly not the strategy for the REIT to buy hotels, but we're very comfortable with this one at the moment.
Okay. My next question is on the DC fund. I understand it's quite early days, but when could we realistically see some payback or upstream in dividends?
So it's a 10-year life development fund. At the end of the 10 years, there's a redemption mechanism. That's not to say that there's not dividends to come out of that fund prior to the 10 years. In fact, the first property will be completed in the next 18 months in Dublin, which we mentioned, 32 MW, which is almost EUR 600 million in value based on current valuations and providing a high yield. I would not want to give you a forecast. Again, my compliance officer is in my ear.
We wanted to show on that chart that the capital gains potential is enormous. Even if the fund does not sell the assets and we own these assets into the long term, that is a 15% yield on cost. That would be very accretive, assuming we continue to own that portfolio into the long term. At this stage, it is sitting in the business trust. We are not expecting it to provide a distribution. Again, we have the REIT with the 100 assets that will continue to drive the income that drives the EUR 0.13 distribution. The business trust, which has this development opportunity, is really in the near term about driving capital gains. Obviously, longer term, the cash flow will start to come in. I am not going to give guidance as to when that will be at this stage.
Okay. Thank you so much.
The last question is on your under-rented properties. I think it's slide 28. You mentioned about 8% of your properties remain under-rented.
No, it's the other way around, Joel. All of our assets, on average, are 8% under-rented.
Average. Okay. Yeah. I'm just wondering how far below market rents. Oh, okay. Okay. I understand.
Some buildings, 20% down, some might be 1% or 2% down, but on average. How can I help you from a forecasting perspective? We are the only REIT that provides reversionary yields.
Yes.
What does that mean? That means the independent valuer's assessment of net property income in four to five years divided by today's valuation. If the reversionary yield is higher than the initial yield, then that tells you that the valuer is forecasting, lease by lease, building by building, substantially higher income growth.
In our case, that's 15%-16% higher than today's initial yield. It's not our forecast. That's our value as forecast. That takes into account the lease being under-rented, the view on market rent growth, the view on occupancy, vacancy, etc. It's a very detailed path for you to understand the growth profile. We've flashed up here on the screen. It's in the appendix. Average reversionary yield, sorry, 7.8% versus initial yield of 6.3%. Therein lies the 15% growth that I was talking about.
Okay. Got it.
If we're sitting on a, if we're sitting on today an 8.5% dividend yield, and we've locked in all of our debt for the next five years, this means that the growth from the income can then come, property income can then come down to DPU.
Okay. Got it. Yeah. All right. I think that's all for me.
Thank you.
Thanks, Joel.
Thank you. Our next question comes from Dale. Dale, please go ahead and unmute yourself to ask your question.
Morning, Dale.
Yeah, morning. Morning, Simon. Morning, Simon and team. Congrats on the results and congrats to Elena on your promotion. Okay, just a few quick questions for me. I think firstly, in terms of the financing cost, right? I saw that in the quarter, you're saying that it moderated to about 3.88%. Given that you have no more refinancing until 2030, how should we be looking at your financing costs? You mean to say that if the ECB continues cutting rates, it will probably only benefit your floating loans.
We have deliberately reduced our fixed rate component. We have put in place a EUR 300 million five-year fixed to floating. We are now only 56% fixed.
This is at the bottom end of the board's policy range. Our board policy, just to remind you, is to be at least 50% fixed. We were almost at that bottom. To the extent that ECB cuts rates further, we have given investors far more exposure to that interest rate cut than we did prior to this recent capital management initiative. We have improved that flexibility. Now, having said that, we have also bought some caps so that if we are all wrong and the ECB has to lift rates, then we are protected at about two and, well, depending on which stack, we can take you through more detail, but it is roughly around where we are now. We have given the downside benefits to investors and capping the upside risk.
Okay.
Meaning to say that going forward, right, I mean, given that you've already experienced quite a fair bit of savings in interest costs to about 3.8%. Assuming all else remaining constant, I think we should be expecting this kind of rates going forward for the next few years.
Yeah. Some of these initiatives will take place or have taken place in the fourth quarter, so after the September results. You'll still see some benefits continue to come through.
Okay. Okay. Sounds good. Okay. My next question is on the divestment. You're saying that there's about EUR 105 million in land divestments, right? If I'm not wrong, there is still that Polish office asset outstanding. Which are the other assets contributing to this EUR 105 million?
Y eah. We mentioned that the Polish asset actually settled in the third quarter, Gdańsk in Poland.
That's now done, and the cash has been received. That's been sold to a residential developer. The two major, and sorry, and two days ago, we closed on EUR 11 million sale of one of our business parks in Italy. A great, which had announced earlier, but the actual cash has now come in. That's now closed. Our announcements tend to be at the time of close rather than the time of the agreement of the SPA. Some of our SPAs do require certain CPs and market norm condition precedents to be finalized. We tend to be very conservative with our announcements. Rather than upfront, we tend to announce them at the back end where there's still some CPs. We'll be able to say imminently exactly the details of the assets that are being sold. Just generally, if I can say, one of the s ales is a portfolio sale. It's in a smaller market that we've been negotiating with this party for a little while on the back of some difference in views on risk in this particular market. We will be able to say more once that's closed. We will be looking to reinvest modestly these proceeds into Western European logistics and light industrials. We have a number of options that we're currently reviewing. We understand that there is a transition period between selling a portfolio and reinvesting. We will obviously monitor that as we come into the February results from an impact on short-term impact, which is, I think, where you're going to ask next. Watch this space. We want to de-risk the portfolio, recycle the capital into higher and better use, both our own portfolio through the AEIs, plus taking advantage of our sponsors' pipeline.
I think that's something that's quite different under our current new sponsor than the old sponsor. We're dealing with a Pan-European, very experienced European company in Stoneweg, Okona, and they have a lot of networks that we're able to take advantage of. We're actually in quite a privileged position on the reinvestment side. We'll do that modestly. We'll also continue to look at buying our stock back at these low prices whenever there's an opportunity to do so.
Okay. Okay. Just one little follow-up, Simon. You're saying this potential portfolio sale, I'm assuming it's an office portfolio?
Maybe not.
It's a mix. Okay. Okay. My final.
It's more a play on a region than it is on the asset type. I wouldn't get too caught up on the asset type. It's more about the region.
We want to make sure that we are clearly seen as a Western European core market REIT. So we're 86% weighted. We'll be very shortly 90% weighted to Western Europe. We want to make that very clear.
Okay. Got it. Got it. So my final follow-up on this is any updates on this maximum? I think previously there were talks about potentially redeveloping or even selling the plans. How is that coming along?
Yeah. So to Joel's point. Italy hotels have been very strong. The hotel market in Italy. And other parts of Europe, such as Spain. Are performing exceptionally well, unlike other hotel markets. It may not be a surprise to you that being only seven blocks from the Colosseum in downtown Rome, adjacent to the new train station, that the value has improved significantly for a hotel conversion rather than for an office play.
We've obviously been trying to do an office pre-lease, but it's got to the point now where maybe someone else has seen better value in this project, converting it into a hotel. Again, watch this space. We will not be doing the hotel development, but that's certainly something that we've witnessed, that the valuation on those sort of sites has materially improved for accommodation in some of these high tourist markets.
Okay. Got it. That's all from me. Thank you.
Thanks, Dale.
Our next question comes from VJ. VJ, please unmute yourself to ask your questions.
Morning, VJ.
Hey, hi. Morning, Simon, Elena, and Hui Chen. Firstly, congrats on a very good set of results. A couple of questions. In terms of this EUR 105 million divestment, this is on top of whatever you have divested for the year, right?
Correct.
This will take us to the EUR 400 million.
Okay. Okay. Can I get some clarity in terms of the EUR 2 million one-off income which you got during this quarter? Where is this from? If you strip off, what would be the actual distribution growth?
Yeah. Some of these one-offs actually were in the six months to June, so they're not prior year periods, they're prior intra-year. In other words, that's quite difficult to answer your question because it does not go to changing the growth year on year. It just went to explain why the third quarter was up 17% relative to the June quarter. It's effectively—so one of the items, for example, is service charge reconciliation. Another benefit was an adjustment on the IFRS amortization of a particular lease that was done earlier on this year.
What we wanted to make sure of was that you do not take the third quarter and just simply multiply it by four and say, "Oh, we have EUR 0.15 of distribution on an annualized basis." It is really, take the EUR 2 million off, that is your underlying quarter. Multiply that by four, if you like, and then you get closer to sort of the run rate.
No, I got it. I am just trying to understand what is this one-off income.
Like I said, it is service charge reconciliation, where we had a rebate from tenants. And then secondly, from amortization of a lease that had incentives that we could reverse.
Okay.
There was also a small insurance claim as well that came through from loss of rent from a fire.
Okay.
Can I know what's the cost of debt for the third quarter alone? And maybe based on the market conditions, market rates, and your current hedging position, would you be able to give some guidance in terms of interest cost for 2026?
The answer to the second question is no. Which end do you want to just explain a little bit on the September quarter cost of debt?
The September quarter cost of debt is around 3.9%. Yeah. It has stabilized from the June quarter. We do not expect any significant increase in the following quarters.
What we can say is the margins are down. As I explained to Dale, now we've gone to 56% fixed only. To give you guidance into 2026, we've given you more exposure to floating rates. Really, what is your view on ECB rate cuts?
We can give you that optionality. Whereas when we were at 86% fixed, we did not give investors optionality to interest rate cuts. The margins are down 40 basis points on our bank loans. And we have shown that the cost of the bond for seven years, the margin is only 175 basis points.
Okay. Got it. That is a good.
The public debt markets were just too good for us not to tap. After that Fitch rating. Back in January, our margin was 195 basis points for five-year debt. Now it is 175 basis points for seven and a quarter-year debt. That is very attractive for unsecured. And really reflects the BBB investment-grade rating. We took the advantage of sort of almost historical low spreads. I mean, there was a small period in 2021 that was equal to this level.
If you pull out the ITRAC's margins for real estate, you will see that the spreads really have compressed tightly in the last six months.
Yep. Yep. Agree. Just one last question. In terms of AiOnX, I mean, thanks for putting out the slide on that. What's your plans on this? Do you plan to further increase your stake, build your stake on this, or is this a level which you're comfortable with?
Excuse me. Again, my compliance team are in my ear saying, "Please do not answer too much of that question." Firstly, we are very comfortable with the EUR 50 million. We have shown you the sort of returns that can be generated on that EUR 50 million from a multiple perspective. We do not have to make any further investments, and we will see substantial gains over that longer period of time.
I should not have said we will may see substantial gains over that long period of time. Now, if there are other opportunities, we have a ROFO with our sponsor. That is not to say down the track we could not do something else. At this stage, we are exceptionally comfortable with the EUR 50 million.
Okay. Okay. All the best. Thanks. That is all I have.
Thanks, Matt.
Thank you very much. We have had some text questions come through from our attendees. Our first question comes from CK, who asks, "Gearing is noted to come down to 39% by 2026. Do you expect it to remain at 39% beyond 2026?"
CK, good question, and thank you. Firstly, gearing levels when valuations and income are expected to rise is a good thing. That is the cycle we are at. Secondly, what is the risk of debt? The risk of debt is a couple-fold.
One is your ability to refinance. If you take on too much debt and you do not have the right portfolio and you are in the wrong part of the cycle, then that has risk. What we have now announced is we have taken that risk out for the next five years. There is no dramatic need for us to reduce our gearing from the current 40% level because from a risk perspective, we do not have debt maturing. The second aspect of debt is around interest cover. It is not just about the LTV level. A lot of investors focus on LTV, and that is right to do so. What is often overlooked is the ICR. This is the second covenant often you will find in facilities. You will note that many Singapore REITs have ICR coverage less than two times at 40% leverage.
Our ICR coverage at 40% leverage is over three times. We are double that of the MAS limits. When we think about our risk, we then think about, okay, what's the risk to the ICR? The risk could be that the income falls. How does an income fall? You may have a major lease expiry that you can't replace, and therefore you lose income. This is why I come back to the resilience of this portfolio. Our largest tenant only accounts for 3.8% of our rent. Even if the worst case, a number of our top tenants were not to renew. By the way, we've just extended all but one of our top 10 tenants out for at least another five or six years, then you have some issues on the ICR.
We are very comfortable at this upper end of our policy range at 40%. Because the nature of our debt is very secure relative to the peer group. We do not want to be held up in this sort of basket of stocks that are highly geared because they are at 40%. When you actually dig down into the debt, it is accretive for our equity investors. If our cost of debt is 3.8%, but our property yield is 6.3%, that is how we can generate high dividend yield. If you think about that, if we trade at NAV, like most logistic REITs do, our distribution can still be over 6%. Because we are generating the high return on equity. 6.3% yield funded by 40% gearing at less than 4% gives you that high yield spread.
This is why Europe is now attracting a substantial amount of foreign capital because there is a substantial yield spread which debt actually enhances at the moment the return on equity. This is where we are in our cycle and in our thinking. I hope that helps explain a bit more color behind your question.
Thank you, Simon. That also answers a follow-up question for CK as well.
Our next question comes from Wei San, who asks, "Given the sharing by Simon that their refinancing has been done until 2030, sorry, can you clarify if the hedging profile for interest rates remains at 85% based on the first half presentation and management's current view on the hedging requirements going forward?"
Yeah, very good question. If we go back to our chart that shows our hedging effective position, we have actually dropped that 85% down to 56%.
Now, we've got much longer duration debt. The underlying debt is fixed. You can see we've got EUR 800 million of our debt in fixed-term bonds at fixed rates. The EUR 300 million bond, we've actually, with a derivative, converted that to the swap rate. That's the difference between the 85% and the now 56%. The underlying debt is fixed. 80% of the underlying debt is fixed.
Thanks, Simon. Our next question comes from Aditya, who asks, "Can you please share the possible timeline for the EUR 105 million divestment? After these divestments executed, will we stop divestments as it has reached near the EUR 400 million divestment target?"
Yes. Weeks and correct.
Thank you. A follow-up question from Aditya. After refinancing debts from divestment proceeds and new bond, will the previous interest rate collar and swap be retired early?
No, we'll leave them.
In place because we did not swap the RCF. That is a floating facility that lasts out to 2028. No, we are not going to be reducing any of our derivatives.
All right. Thank you very much.
Just to give you some extra color. The HUG Support development loan, as part of the terms with our Dutch bank, we have fixed that for the five-year term. Thank you, Simon. With a cap and collar, I should say. There is a floor to that at 1.25%. If interest rates fall to 1.25%, we get the benefit. If interest rates fall below 1.25%, then we have a floor.
Thank you. That does bring our Q&A session to a close. Simon, I will hand back to you for any closing remarks.
Great. Thank you very much.
Look, I'm glad a lot of the questions focused in on the balance sheet because it's now fortress-like. It's been an incredible journey over the last six to nine months in terms of refinancing, particularly in the last month or so. We've really taken care of all of the debt that was expiring over the next couple of years. Not only have we extended the duration to almost six years in the debt with no debt expiring until 2030, it's also enabled us to get interest rate savings of around 30-40 basis points on the previous facilities. More importantly, overall, the portfolio continues to demonstrate very strong fundamentals, delivering almost 6% like-for-like NPI growth. Remember, that's an environment of very low GDP and inflation throughout the world. Secondly, we've been able to drive a very strong rent reversion of over 7% while.
Undertaking a substantial amount of leasing activity. Even though, again, the macro environment may be more benign, we have been able to undertake almost 8% of our logistics portfolio to be released in the last three months. With that, we think the building blocks are in place for driving stronger unit holder returns over the coming period. Again, thank you very much for your attention and for your investment. We look forward to catching up and speaking soon. Thank you.