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Edited Transcript of PFI.NZ earnings conference call or presentation 18-Aug-19 10:30pm GMT

Interim 2019 Property for Industry Ltd Earnings Presentation

Wellington Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Property for Industry Ltd earnings conference call or presentation Sunday, August 18, 2019 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Peirce

Property For Industry Limited - Chief Finance & Operating Officer

* Simon Woodhams

Property For Industry Limited - CEO

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Conference Call Participants

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* Jeremy Andrew Simpson

Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities

* Nick Mar

Macquarie Research - Analyst

* Owen Batchelor

Jarden Limited, Research Division - VP of Equity Research

* Shane Solly

Harbour Asset Management Limited - Director & Portfolio Manager

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to PFI Interim Results Presentation Conference Call. (Operator Instructions). I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Simon Woodhams. Thank you. Please go ahead.

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Simon Woodhams, Property For Industry Limited - CEO [2]

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Good morning, and welcome to Property For Industry's interim results announcement for the 6 months to 30 June 2019. It's Simon Woodhams speaking, CEO of PFI. Alongside with me today is Craig Peirce, our Chief Finance and Operating Officer.

Today, Craig and I will speak to the topics outlined in the agenda on Page 2 of the presentation. I will begin by reviewing the highlights for the interim period and give you an overview of the portfolio and key metrics ended 30 June 2019. Craig is then going to take you through the interim results before presenting the section on capital management. We will then speak to the market, after which I'll give an update on the work we have done on our priorities for the year-to-date. And then we will close the presentation, after which there'll be an opportunity for participants on the call to ask any questions you may have.

If you turn to Page 4 of the presentation highlighted -- headed Highlights. We're pleased to report a strong start to the year, which as at 30 June, sees the company in a great position. Of note that Craig and I will speak to further throughout the presentation is continued growth in both our interim profit after tax and our AFFO earnings. Our NTA increased by $0.054 cents or 3% to $1.83 after we booked $23.4 million of valuation gains. These has been as a result of independent valuations on 13 of our properties. There's also apparent significant leasing activity, which resulted in 11% of the portfolio being leased for an average term of 6.8 years.

If you turn to Slide 6, where we have a snapshot of the portfolio statistics. You can see that the company currently owns a well-diversified portfolio of 94 properties that is leased to 147 tenants. Over the last 6 months, the value of the portfolio increased by almost $50 million to approximately $1.37 billion. Our occupancy continues to track very well at 99.7%, and our contract rent has also grown to $83.1 million.

As you'd expect, the majority of our portfolio is comprised of industrial property located here in Auckland, the deepest, strongest market in the country. And pleasingly, our weighted average lease term has increased over the last 6 months to 5.71 years.

Turning to Slide 7. As at June 30, independent valuations were carried out on 13 of our properties that, in the main, had, had either significant leasing or capital works undertaken. The exception to this was at 314 Neilson Street, where a small property was partially destroyed in a fire that occurred in April. These valuations resulted in a $23.4 million or 8.8% uplift over the 13 properties. If you exclude 314 Neilson Street and 6 Donnor Place, which is a property where a large refurbishment project has been undertaken, the uplift was $25 million or 11.3%. The desktop review on the remainder of the portfolio confirmed that there's not been a material change

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in value at the end of the interim period. And as a result of the whole process, our portfolio cap rate has firmed from 6.21% to 6.09%.

We would note that CBRE current estimates of Auckland prime and secondary industrial yields stood at 5.17% and 6.08%, respectively, which indicates that all things being equal, further increases in the value of our portfolio can be expected at the December year-end valuation round.

If you turn to Slide 8, which is headed Leasing. This page will summarize the large leasing transactions that took place during the period. As noted to the side, more than 90% of these deals were renewals to existing tenants, and importantly, high-quality tenants such as DHL, Jacobs Engineering and Brambles. This, in our view, confirms that our properties are highly functional and fit for purpose. We also expect that it strengthens the relationships we have built with our tenants over the years. A picture of the leasing during the period and the length of lease that tenants have been prepared to take on, on average, 6.8 years in the low levels of incentive we have been offering, less than 2 weeks per year of term.

If you can turn to Slide 9. Rent reviews were completed on 56 leases during the period resulting in an average annual increase of 3.3% across $23.4 million of contract rent. Pleasingly, 9 of those reviews reached the market, and these reviews delivered an annualized increase of 3.3% over an average review period of 3.7 years across $4.6 million contract rent. We are estimating that our Auckland industrial portfolio is approximately 5% under-rented, and CBRE predicted that strong market conditions will see investor rental growth to continue over the next 5 years. We therefore anticipate PFI will continue to access this forecast growth by way of future market reviews. As you can see on this graph, approximately 5% of lease events in the second half of the year are market related.

Turning to Slide 10. You can see on the table on top right-hand corner that as at 30 June, we had just 2.8% of the contract rent due to expire in the second half of the year. Post June 30, we've secured a short-term extension on 2 Pacific Rise for until March 2020, and terms on 511 Mount Wellington Highway have also been agreed. Combined with current vacancy of 0.3%, there is just 1.5% of contract rents we dealt with in the remainder of the year. With continued low vacancy rates forecast in the industrial market and a smooth lease expiry profile over the medium term, PFI continues to be in a robust position.

I'm now going to hand the presentation over to Craig, who will talk you through the finances starting on Slide 11.

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [3]

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Well, thanks, Simon, and good morning, everyone. Over the next few slides, I'll take you through the 2019 interim results, and I'll provide a quick update on capital management before touching on the local economic conditions.

Please turn to Slide 12. First up, we take a look at net rental income which increased by $1.7 million or 4.3% to $41 million. Looking at the composition of the change, we can see from the graph on this slide that positive leasing activity during the first 6 months of the year caused net rental income to increase by total of $1.1 million. Impact of acquisitions also caused an increase of $1 million. These increases will be partially offset by $0.3 million of lost rent from the properties now under redevelopment and $0.1 million from disposals. The fire at 314 Neilson Street in Penrose in April also caused a reduction albeit this lost rent is recovered from insurers.

Moving now to Slide 13. We see here how the activity for the first 6 months of 2019 has translated into funds from operations and adjusted funds from operations. FFO earnings per share were in line with the prior interim period and slightly ahead of the second half of 2018, but AFFO earnings per share was $0.59 per share or 16.8% ahead of the prior interim period and $0.14 per share or 3.5% ahead of the second half of 2018.

Maintenance CapEx is a key driver of the increase in AFFO. This $0.4 million or 6 basis points of maintenance CapEx was incurred in the first half of 2019 as compared to 57 basis points in the first half of 2018 and 8 basis points in the second half of 2018.

As noted in previous communications, we expect the maintenance CapEx will average around 35 basis points per annum but the timing of this will be volatile. Given the low level of maintenance CapEx was incurred in the first half of 2019, a slightly lower level of maintenance CapEx and 30 basis points is forecast for full year 2019.

Please turn to Slide 14. Thinking now about dividends, the PFI Board has today resolved our second quarter cash dividend of $0.018 per share, and this second quarter dividend will take cash dividends for the first 6 months of the year to $0.036 per share in line with the first 6 months of the prior year. This level of dividend has resulted in the payout ratio as noted on this slide. And you can see, no change in the FFO payout ratio and a large reduction in the AFFO payout ratio, of course, for the most part for that low level of maintenance CapEx mentioned previously.

Next on this slide, we cover our 2019 guidance. We continue to guide the 2019 full year cash dividends of $0.076 per share which we expect will approximate 80% to 90% of FFO earnings and 95% to 100% of AFFO earnings. We are now guiding to the midpoint of that dividend policy ranges. FFO earnings of around $0.0895 per share and AFFO earnings of around $0.078 per share. But we do note that there is potential for AFFO earnings per share to exceed this guidance if our target expectations for maintenance CapEx of 30 basis points are not met.

Turning to Slide 15. Looking now at the balance sheet, here we provide some more detail on the increase in the value of PFI's investment properties. The value of the portfolio, as Simon mentioned, is around $1.37 billion, up almost $50 million following the Spartan Road acquisition in March of this year and of course, the $23.4 million uplift from independent valuations. Full revaluation of the whole portfolio will take place at the end of the year. And again, as Simon mentioned, further increases in value can be expected if market conditions remain unchanged.

Turning to Slide 16 where we look at NTA. This slide bridges NTA per share at the end of 2018

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sorry, $1.777 per share to $1.831 per share as of the end of the 2019 interim period. The chart by and large speaks for itself, with the largest reason for that increase in NTA being the increase in the fair value of investment properties.

So we'll now move on to capital management on Slide '18. Looking at the slide headed up funding, covenants and interest rates. There were no changes to PFI's bank facilities during the first half of the year. The total facilities of $275 million are now due to expire in May 2020 through to May 2022. And when combined with the company's bonds, the weighted average term to expiry stands at 3.5 years for all facilities.

With regard to covenants, we ended the interim period with gearing of 31.1% and an interest cover ratio of 3.9x, both metrics being well inside their respective covenant levels. One thing to call out from this slide is that our low level of gearing provides us with the capacity to deliver on our recycling strategy. In particular, it gives us the ability to secure industrial property opportunities before divesting its nonindustrial properties.

Turning to Slide 19. This slide looks at 2 things: the maturity profile for PFI's bank facilities and bonds that we're just talking about; and the cost of PFI's hedging. So thinking now about hedging, we're pleased to report that the weighted average cost of debt has reduced again during the 6-month period to 4.56% down from 4.86%. One of the key drivers of that decrease is of course FX rate hedging. In that regard, we're well placed to continue to take advantage of the current low interest rate environment. Based on current hedging and debt levels, an average of approximately 55% of PFI's debt will be hedged at an average rate of approximately 3.8% for the second half of the year, with the remainder on historically low floating interest rates.

That's all on capital management for now. Please turn to Slide 21. We will touch on the market and the economy in general. So starting with the macro view. In the July ANZ Business Outlook Survey, headline business confidence fell 6 points during the month, where net 44% of respondents reporting that they expect general business conditions to deteriorate in the year ahead. Employment intentions also fell during the month from 0 to a net 6% of firms expecting to cut jobs. From its ongoing trade tensions between major economies, rising protectionism and slumping exports, a growing number of central banks have taken action to shore up falling economies. All of this against the background of inflation that remains subdued across the OECD.

Interest rates in the main industrialized economies have fallen sharply, and local markets continue to reflect the likelihood of further easing by the RBNZ which cut the OCR by 50 basis points on the 7th of August.

So with that as the macro backdrop, I'll hand you over to Simon, who'll talk through the property market and then finish off the presentation. Of course, if you have any questions, please don't hesitate to sing out in the Q&A session at the end of the call.

Over to you, Simon.

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Simon Woodhams, Property For Industry Limited - CEO [4]

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Thanks, Craig. I'm on Slide 22 where we drop down onto the property market. In a recent report, CBRE noted that investment markets will continue to benefit from the renewed monetary stimulus being implemented by Reserve Banks around the world. We've seen low interest rate for the weight of capital from investors has keeping demand for property, especially industrial property, very high.

CBRE ranked secondary industrial first with a forecast total return of 11.2% per annum; and prime industrial second with forecast total return of 8.9% out of 12 classes on their 5-year return forecasts. Vacancy rates in Auckland across industrial properties remain below 2%, and prime yields for assets under $10 million sit between 4.75% to 5.25% with numerous sales in the last 12 months supporting these levels.

If you could turn to Slide 24 headed priorities. At the beginning of the year, we highlighted to the market that it was our vision for PFI to be recognized as one of the country's foremost listed property vehicles. And to deliver on this, we highlighted several initiatives that we would be prioritizing during 2019. These included beginning the process of divesting out of nonindustrial properties and recycling that capital received back into quality industrial property while further acquisitions. We also wanted to focus on value-add opportunities within our existing portfolio. And finally, we noted that completing the leasing down at Carlaw Park and the then-vacant space is also a key focus.

We've already touched on leasing previously. In the next 3 slides, we'll give you an update to how we're tracking with the first 3 workstreams.

Turning to Slide 25. In January, we settled the sale of a small asset located at 50 Parkside Road down at Wellington for $3.4 million. And since that time, we have been working on preparing several assets for sale. The first being 229 Dairy Flat Highway in Albany, Auckland. This is a mixed-used asset that is comprised of a Quest Hotel, commercial office space and some food retail outlets and sits outside our industrial property focus. We've recently completed several leasing initiatives on-site and believe the time is appropriate to divest the property. We've engaged Colliers International to run a sales campaign who offers to join at the end of August. The property has a current book value of $28 million.

Turn to Slide 26. With capital values in the current industrial property market at record highs, PFI has taken a cautious view on buying more property. That said, since the beginning of the year, we had committed $51.4 million to 2 acquisitions. Both of these properties have been acquired in off-market campaigns by our sale and leaseback transactions. We paid to this process as it allows us to work with the vendors to set lease terms that work for both parties.

The first property we purchased was 51-61 Spartan Road in Takanini. Leased to ASX-listed company MaxiTRANS for 12 years, this property comes with future development potential at annual fixed rental growth. We paid $17.2 million for this property which represented a purchase yield of 5.35%. The second property that we have just secured is a property to be developed at Tidal Road in Mangere. It will comprise 13,000 square meters of warehouse in canopy with associated offices. We've worked on this project with a developer and a tenant who had committed to an initial 12-year lease term that benefits from annual fixed rental growth of 2.5%. The property was purchased for a net purchase price of $34.2 million and a project that is estimated to provide PFI a 5.35% return. The acquisition is still subject to standard conditions of resource and voting intent and is expected to be completed in February 2021.

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the quality property of long lease terms, strong tenant covenant and fixed growth, assets that will underpin future dividend growth for the company.

Please turn to Slide 27. Value-add projects within our existing portfolio have also been a key focus during the period. Our portfolio contains a number of properties that have opportunities to refurbish or add build in a year or 2. In May, we completed the 2,500-square-meter development at 212 Cavendish Drive in Wiri. This was a spec design and build project that secured the tenant Kiwi Steel during the design phase. Kiwi Steel has signed on for 15 years.

We also committed to 4 more projects during the period that have a combined capital value of $8.3 million and are expected to deliver a return on incremental cost of approximately 6.3%. Allowances for these projects are the refurbishment of 6 Donnor Place in Mount Wellington, where we have committed to spend $5.6 million.

Since the end of the interim period, we've secured Coca-Cola for the site. And on completions of the works later this year, a new 6-year lease will commence. We also have a further $10.8 million of projects in the final stages of planning and negotiation. We are anticipating that these will commence prior to the year-end.

And to our final slide, 29. We have a very clear purpose here at PFI, led us to deliver strong, stable income for our investors and to generate prosperity for New Zealand. The company is in a robust position. We have an excellent portfolio that is well leased, a strong balance sheet with low levels of gearing and a supportive Board of Directors.

During the first 6 months of the year, the management team has undertaken a significant body of work. It has seen increased earnings, valuation gain and numerous priorities advanced. Our sector of the market, the industrial property market, has performed exceptionally well over the last 5 years. While this is forecast to continue, we are very well positioned to take advantage of future growth or indeed, withstand any headwinds that might be out there.

Thank you. That concludes the presentation. Craig and I will work on any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Jeremy Simpson from Forsyth Barr.

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [2]

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Just a couple of small things really. Just a couple of minor things. Just in terms of the revals so you were saying that it's basically market rental growth. It's very little in the way of cap rate change in the period?

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Simon Woodhams, Property For Industry Limited - CEO [3]

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So the ones that we've got revalued were 13. So they are the ones that have had -- it's either large leasing transaction or open CapEx [spend on them]. Yes. Typically, there's -- it's a combination of both really, a little bit of market growth but also some cap rate compression on the result of new leases. But yes, cap rates in June, if you look at the market, have firmed, I think, over the last 6 months, it's fair to say. Some of the evidence we're seeing, some of the sales evidence, it's well below 5% reasonable-sized transactions. There's obviously the Visy packaging site down at Hamilton, which I think a lot of people would probably followed or we've talked to a few people about. So that was an asset that had $3.5 million rent roll to Visy. It's an Australian company. Triple net lease obviously, but 20-year lease and that's sold for 4.9%, so well below 5%, $71 million. So -- and then write-down for some of the smaller assets selling out at Wiri sort of around that $10 million mark, again sort of 4.7% to 4.9% depending on how you analyze it. So there has been further cap rate compression but probably deal-specific, really.

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [4]

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Yes. So -- and you highlighted there that your cap rates look pretty attractive compared to what CBRE think to where the rate the market is currently. So certainly looks like some upside in the reval still. The...

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Simon Woodhams, Property For Industry Limited - CEO [5]

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Well, let me now -- I guess we go through a process, Jeremy, of having an independent desktop review, and we only get a full valuation if we tip over that 5% mark. And so we haven't, in the main, tipped over that 5% mark. It would be on asset where there's been a market rent review or something like that, and that particular asset tipped over 5% and we got it revalued. But look, as a general rule, no, it hasn't hit 5% on materiality.

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [6]

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That's helpful. And just lastly, how are your tenants feeling about life at the moment?

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Simon Woodhams, Property For Industry Limited - CEO [7]

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Yes, that's an interesting one there. We get out and we talk to them often. Again, it's probably case by case, most of them seem to be pretty happy. Our accounts receivable were at all-time lows, which is always a pretty good indication. That said, though, we did actually lose a small tenants about 3 weeks ago. There was a subcontractor who made aluminum joinery who was paying us $167,000 rent. They paid their rent in June and didn't pay it in July and then went into liquidation the first week of August. So I think there's probably signs out there that some people have probably doing it tough, whereas others are tracking along. I mean it's into it -- we're down ahead of the 9-month bank guarantee, so we're called on that. And we've agreed in terms with another tenant to go in there at the end of the year. So it's effectively on the market for 2 weeks, and it looks like we've managed to lease it straight away. So I think that sort of indicates the strength of the industrial market. But there's no doubt -- we have tenants from Fletcher Building through to private companies, you get a varied sort of response across this, but in general everyone's paying their rent and the team's pretty happy.

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Operator [8]

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Your next question comes from the line of Nick Mar from Macquarie.

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Nick Mar, Macquarie Research - Analyst [9]

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Just a few. On the fire, how much is the deductible on that? Because it seems like obviously, you've only written a part of it down. Is it going to cover much of that or you going to lose this deductible?

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [10]

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No, the deductible is a very small, the -- maybe $1,000, something like that. Yes. No, no, it's not that. It's 2 warehouses really and the fire was in one of them. And it did touch the other warehouse, a small amount, but yes, it didn't really hit the other one so bad. So yes, and essentially the write-down reflects the fact that we now hold that particular part of the site and land value less the cost of demolition. Obviously, as we build -- they're building back up again or building in its place, we capitalize the balance sheet. From a cash flow point of view, the insurers cover there. So we're very well covered. Yes.

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Nick Mar, Macquarie Research - Analyst [11]

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And then just on the property bought in the Tidal Road. Can you just talk through whether you're financing the developer through and how the payments will work? And then just, I guess, in general, the decision to buy something brand new versus try and build this option to sell?

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Simon Woodhams, Property For Industry Limited - CEO [12]

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So yes, it is a development and we're funding it through. So on receipt of building and resource consents, we make an initial settlement to the developer and they will fund it through on a month-by-month percentage complete basis. So it will take about 12 months of construction once they're actually on site. So that's how it's funded through, and that allows us to benefit some of the funding benefits and that increases or juices up the return on initial yield to bring it up to 5.35%.

In terms of the thought pattern around acquiring something that's not being built, I guess, or trying to do that ourselves, it's pretty hard out there to go and find some decent lands. It's probably one of the first things. And we've looked at it in terms of do we go buy a block of land that doesn't yield anything, take on tenancy risk, take on development risk, and it wasn't something we're enthused to. It's probably down the track in terms of our risk profile. And we see this is quite a good way of buying A-grade property once it's completed, this thing we have a 13 meters stud height brand-new build, modern ESG sort of quality, et cetera, et cetera. That really derisks it for PFI. We're very comfortable with the developer. They are a long-term developer, been around for 30-plus years. And the tenants are very good quality tenant which there'll be a bank guarantee of sort of circa $1.5 million put in place on settlement. So it's quite a good way for us to derisk acquisitions. And also in terms of the timing of the sale of 229 Dairy Flat Highway works then quite well for us.

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Nick Mar, Macquarie Research - Analyst [13]

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Cool. And just, sorry, back on the funding structure. Do you know what kind of spread overview over the kind of your funding costs you'll fund them at? And...

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [14]

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We do know that -- yes.

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Simon Woodhams, Property For Industry Limited - CEO [15]

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Yes, yes. We do.

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Nick Mar, Macquarie Research - Analyst [16]

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Any color you can provide for us to try to figure it out?

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [17]

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I mean it -- yes. It's going to provide, broadly speaking, $1 million as a benefit back to us. So it's good for them, good for us. So we have step-in rights, we have bank guarantees, we have a QS on our side and all that sort of thing like that. So it's a very secure project from our point of view. You can get there, as Simon said, we get to pick it up at a yield that's in half because we'll have funding benefit. So yes.

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Nick Mar, Macquarie Research - Analyst [18]

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And then just on the Donnor Place property, when you guys look at the kind of development yield and stuff, you've obviously taken a bit of a write-down there. Is that just -- is that write-down around risk or is that write-down around just the fact that it might have been out of rentage or is it something else?

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Simon Woodhams, Property For Industry Limited - CEO [19]

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Yes. Look, it's pretty small bear, that one. Net growth in there was $0.5 million or 2.6%. When we came to the half year, we had not yet signed up Coca-Cola. And so like you said, it really just with the valuers' view of leasing periods, so all of those sorts of things. Since then, we've now signed up Coca-Cola, so if we had to get that done prior to...

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [20]

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June 30.

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Simon Woodhams, Property For Industry Limited - CEO [21]

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June 30, we wouldn't have seen any write-down there. So yes, it's really just like you said, a reflection of those incentives, lease-up periods, all that sort of thing like that.

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [22]

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It's timing issue.

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Simon Woodhams, Property For Industry Limited - CEO [23]

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Timing issue more than anything. Yes.

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Nick Mar, Macquarie Research - Analyst [24]

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And then just lastly on the under-renting, you've come out with a 5% number. Is there any different to what you thought the industrial would have been at the full year '18 or is the difference just excluding the nonindustrial that there's some kind of concentrate over-renting in there?

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [25]

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No. We've come at that a couple of different ways. We've gone through and reanalyze our portfolio on a lease-by-lease basis and look at the sort of -- gives market evidence out there. We've also had look at what rent reviews we've been doing over the last little while. And I think we've got that numbers there. Again, the difference is probably -- one of the key differences is when you get a over under-renting percentage through your valuation process, that's the -- value is market rental assessment for asset valuation. And I guess there's been quite a divergence between a rental assessment for an asset valuation and a rental assessment for a rent review now. So it's really just reflecting some of that.

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Operator [26]

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Your next question comes from the line of Shane Solly from Harbour Asset Management.

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Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [27]

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Can you just talk about ongoing asset sales, and you've obviously got 1 or 2 things you're still working on? And then I guess if you don't redeploy the capital gearing once it's down again, where do you see that tracking to with pending out asset sales?

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Simon Woodhams, Property For Industry Limited - CEO [28]

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Do you want me to?

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [29]

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Yes. Sure. I guess our view, Shane, is that we -- each of these assets that we bring to market, we try to maximize value for PFI. I mean I think Simon mentioned 229 Dairy Flat Highway. There's been a number of leases completed there. And so I feel the time's right to bring that to market. Equally, Carlaw Park, a lot of the work is being done there. There's still a few details to work through, and the tenants are filling out down there. And so we're always going to be trying to bring these things to market when PFI shareholders have got -- they made full value for that in our opinion. So then I guess the job

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we're going to match the sales and acquisitions, so that we don't have a dilution from an earnings point of view. I mean you would have seen the purchase late last year of Hautu, early this year of Spartan Road and then there's the Tidal Road one. So our view is just that we're happy to buy first with 31% gearing. We're happy to buy first -- keep those earnings up and match that with disposals when those assets are -- that we've sort of full valuation mark. So 229 is the first cab of the rank and there's a bit of work on some of the others, so.

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Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [30]

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Okay. Just sort of picking up on the acquisition piece. It is quite a robust market for demand of good assets. And so we can expect to see more of the fund-through-type model? Was it sort of the route you see next year to 3 or...

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Simon Woodhams, Property For Industry Limited - CEO [31]

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Yes. I definitely think it's -- they don't come along often, but it is decently an advantage that PFI has in terms of laying out the deliver funding benefits to a developer. So it's one of the tools we have in the toolbox. And if we can use it to get them first placed and the Tidal Road one is a good one. We managed to sit down with both the tenants and the developer and write the lease to a PFI standard, change a few things that they were offering, and it's going to work out well for both parties. And as Craig mentioned earlier, PFI will pick up close to $1 million of funding benefits on that. So it just juices up the return to shareholders. So provided that it's structured appropriately and risk is dealt with, we think it's a really good way of delivering up A-grade assets into the portfolio.

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Operator [32]

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(Operator Instructions) And your next question comes from the line of Owen Batchelor from Jarden Securities.

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Owen Batchelor, Jarden Limited, Research Division - VP of Equity Research [33]

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Just on the rent reviews, so you saw an average annualized uplift of 3.3% and end market reviews were also 3.3%. Are you able to provide us with the average annualized increase for both fixed and CPI-linked as well?

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [34]

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No, we didn't break them that out. Sorry. But yes, I mean by and large, FX increase would be between 2.5% and 3%. We wouldn't be -- you wouldn't be getting any more than that out of the fixed.

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Simon Woodhams, Property For Industry Limited - CEO [35]

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I think our highest fund is 3% and our, sort of lowest is 2.25%. And then you've got a mixture of CPI plus margin. So yes, even if CPI is running where it is, it seems to be just over 2.22%, 2.23%.

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Owen Batchelor, Jarden Limited, Research Division - VP of Equity Research [36]

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Okay. Great. And then just on those CBRE cap rates and the outlook for further compression. So the CBRE secondary cap rate of 6.08% and your portfolio is now 6.09%. So the further compression that you sort of allude to, I guess, that does come from prime industrial. How much of your portfolio do you consider to be prime?

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Simon Woodhams, Property For Industry Limited - CEO [37]

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I just take a step back there. Our portfolio cap rate is obviously a blend of 94x considering different stages of valuation, I guess you could say different lease terms, different qualities whereas the CBREs are rolling sort of point in time type of thing. So in terms of down to your second question around prime versus secondary, I'd say close to half of ours would be prime and half would be secondary. Secondary is not a great definition though...

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [38]

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Yes. It's not a great definition.

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Simon Woodhams, Property For Industry Limited - CEO [39]

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It's what CBRE uses. We've prepared to look at our portfolio. It is highly functional and it's for purpose, which is probably evident on the amount of retentions we hit. Not everyone needs a shiny [oyster] box at $140, $145 a square meter. So yes.

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [40]

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I mean I was just going to add. I mean if you look at something like Donnor Place, where -- prior to Wickliffe leasing, I mean you probably wouldn't have full pay -- prime property. I mean obviously, we're going to have redevelop it, have great frontage, have fantastic tenants on a good lease...

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Simon Woodhams, Property For Industry Limited - CEO [41]

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We're just going, what, from $95 to $123 a square meter...

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [42]

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Yes...

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Simon Woodhams, Property For Industry Limited - CEO [43]

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You can -- what is the definition of prime or seeking rents...

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [44]

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Yes. And that won't be 6.09% at the end of that either. I guess we're just trying to provide some reference points, Owen, for people to kind of get a sense of where things might go. As Simon said, there's numerous transactions out there with 4s in the NAM. So yes, the blended portfolio cap rate of 6.08% whatever it is.

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Simon Woodhams, Property For Industry Limited - CEO [45]

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We're very comfortable with.

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Craig Peirce, Property For Industry Limited - Chief Finance & Operating Officer [46]

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Yes.

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Simon Woodhams, Property For Industry Limited - CEO [47]

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I don't think we've got more questions there. Is there any more?

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Operator [48]

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(Operator Instructions)

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Simon Woodhams, Property For Industry Limited - CEO [49]

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All right, guys and girls, thanks for calling in. Obviously, Craig and I have got meetings lined up with a lot of you who would have called and stayed. But if anyone has got any other questions or need any other information, just pick up the phone to either myself or Craig. And we appreciate you tuning in. Thank you.

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Operator [50]

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And that does conclude the conference for today. Thank you for participating. You may all now disconnect. Speaker, please stand by.