Argosy Property Limited

Thank you. Good morning, and thanks for joining us for the annual results presentation.

It's fair to say that the year has not been without its challenges. We came back from a Christmas break, reasonably positive, and then we ended up with a war and Iran and the return of nonproductive imported inflation and the effects of this are going to be with us for some time.

The portfolio has actually performed reasonably well. What we're seeing though in the market is that conversion rates have pushed out by over a month.

Uncertainty does reign across the leasing market. And the flip of that is that the retention rate is up to a decade-long high because people are more likely to stay in the premise they're in.

The green part of the portfolio is performing really well. We do expect to see continued growth in demand, particularly in the industrial space.

And the surprise performer at the present in terms of inquiry levels is really the office area. We're getting relatively better inquiry there.

Industrially, no surprise, relatively less so. And with retail, large-format retail, principally for us, that's Albany.

It's very much a site-specific issue. The rich getting richer, the better location is doing better.

And it really is, in a lot of ways, dependent on the base from which each of those sectors have started. When we look at the results, the rent reviews have actually been a little bit better than we had expected and projected.

Some of that has to do with tenants wanting to stay put. Net property income overall has been up 3.3%.

The revaluation gain was a welcome positive piece of news. And all of the valuers did mention the conflict in Iran, but they haven't qualified the valuations accordingly.

So what we're seeing is rental growth is surprising on the upside in a couple of locations, particularly the Albany Mega Centre, a little bit of cap rate firming and overall, a fairly tidy result for the year. Turning to the portfolio highlights.

The -- obviously, the vacancy rate is a bit higher than we would have liked. That is going to change significantly when we get this Neilson Street lease through, which I'll talk about shortly.

And in a lot of ways, that tenant retention rate is a comfortable payback for what has been a reasonably quiet leasing market. Overall, the data is still looking reasonably secure.

Looking at the revaluations. The -- we're still seeing reasonably good investment demand for domestic -- from domestic buyers.

If you're talking internationally, far less so, they're far more concerned about geopolitical events and so on. Domestic buyers surprisingly firm, noting that there is some reasonable degree of appetite for a level of risk.

And so it's not only the vanilla assets that we're seeing interest and across the market. We've completed some sales during the year.

Obviously, the Henderson Place sale was really positive. 143 Lambton Quay, nice to have the plug and the bar, if I guess, but that one sold a little under book, but not a lot of money when you consider that it was effectively a redevelopment site, and the end value was much higher.

So a proportion of in value wasn't as much as it looked. And since then we've got interest, in fact, under a conditional agreement for the warehouse in Taupo, again, well over book value.

So it's kind of illustrating that there is a level of risk appetite and domestic buyers remain reasonably active. And we look at what's happening in the development space.

Development activity going forward is likely to be minimal, really. We're expecting cost increases in the construction sector of 10% to 15% based on the oil price.

And that's a double whammy, one, because the construction industry is quite a big user of oil products with plastics and so on. And then, of course, there is the transport and delivery impact of the fuel cost itself.

So there is some pressure in that space, and of course, we're looking at a situation where economically, it could be quite challenging and discretionary spend is already very constrained. Turning to 224 Neilson Street on the really good side in the building awards last week, we picked up in the industrial sector, gold and best in category for this building, and took out the overall sustainability awards.

So that was really positive. The -- we do have a conditional agreement to lease out at the moment.

That agreement is with the tenant for signing. We were hoping to have it back by now.

It hasn't appeared yet. Feeling fairly positive about it.

That's not our only tenant. We do have 2 others who are already at an advanced stage of negotiations.

So sorry, we can't deliver a confirmed deal, but it's looking fairly close. 8-14 Mt Richmond Drive, not a lot to talk about in development that actually achieved all its targets.

We have a very happy tenant with position with the premises, everything has gone very, very well. And the 6 Green Star rating has been confirmed on that asset.

So I'll move on to get Dave to talk about the financials.

Thanks, Peter, and hello, everyone. So the first slide from me is the gross property income waterfall.

Gross profit income was $137.5 million compared to $132.7 million last year, up by 3.6%. Rent reviews contributed strongly to the increase.

There were 111 reviews in the period on existing rent of $81 million, 72% were fixed with an annualized increase of 3.1%. 25% were market with an annualized increase of 4.8% and 3% were CPI with an annualized increase of 2.8%.

The amount being reviewed in FY '27 is even higher at $109 million with 60% of those fixed. There was a solid contribution too from the acquisition of 291 East Tamaki Road in the completed and leased Warehouse B development at 224 Neilson Street.

Offsetting this somewhat was the lost income from the sale of 8 Forge Way in March 2025. So on to the next slide, net profit for the year.

Net property income was up by 3.3% on the prior period to $120.8 million. Net property expenses were up by $900,000 as nonrecoverable rates increases in Wellington and OpEx on vacancy more than offset insurance savings.

Our insurance capital has been a great initiative, allowing us to market directly to reinsurers, and there's a lot more information on this in our sustainability report, which was issued today. Expenses were flat.

Management expense to NPI improved to 9.4% from 9.8% last year, and the management expense ratio was 50 basis points, down from 56 basis points last year. Net interest expense was $2.3 million, down on last year.

The rate savings are more than compensated for higher average debt this year. So Peter has covered off the revaluation gain, which included a $4.4 million gain on the 2 held-for-sale properties 4 Henderson Place and 143 Lambton Quay in Wellington.

We'll talk about tax on the next slide. Net profit after tax was $127.7 million compared to $125.9 million last year.

The next slide from me is net distributable income. After the usual fair value adjustments, gross distributable income was $70.4 million, up by 9.8% on the prior year.

Current tax expense was $9.5 million compared to $8.3 million last year. This was mainly due to higher taxable income.

We did receive an investment boost tax benefit this year of $1.6 million related to the completion of Warehouse A at Neilson Street, offsetting this was lower deductions on development leasing incentives, lower depreciation and lower deductions for fees and maintenance and fit out disposals. On a per share basis, net distributable income was $0.0705 per share compared to $0.0658 per share last year, up by 7.1%.

The next slide covers adjusted funds from operations or FO. FO adjustments are reasonably consistent with last year.

Amortization is up due to the write-off of incentives and leasing costs from a terminated lease in the earlier half of this year. Maintenance expense is up by $1.4 million on last year, mainly due to more tenant fit-outs and HVAC replacement at Favona Road.

So FO was $59.1 million compared to $54.6 million last year, an increase of 8.3%. On a per share basis, FO was $0.0685 per share compared to $0.0643 per share last year.

Our dividend payout ratio was 97% of AFO and 90% of FFO. The next slide covers the movement in investment property.

The value of investment properties increased by $94 million over the year. Again, we've talked about the revaluation gain.

We acquired 291 East Tamaki Road during the second half of the year and divested 2 assets, as I mentioned, capital spending was mainly on Mt Richmond and the completion of 224 Neilson Street. So the portfolio after deducting the right-of-use asset in respect of 39 Market Place, was valued at $2.2 billion at 31 March.

The next slide looks at debt to total assets. So the balance sheet is in pretty good shape.

Debt to total assets was 37.2% at 31 March, but this has since fallen to just over 36% following the settlement of held-for-sale assets in April and May. We have another noncore property and the conditional contract currently.

As Peter mentioned, that's the property on the corner of Taniwha and Paora Hapi Street and Taupo, and that probably is expected to settle in October this year. On top of the Taupo property, there are 3 of the 5 properties regarded as noncore, with a combined book value of $129 million, which we expect to divest over the medium term.

Next slide covers interest rate management. And great to see rates continue to fall over the period.

Our weighted average cost of debt was 4.6% at 31 March compared to 5.1% in the prior year. Interest cover ratio has also improved to 2.7x from 2.5x last year and the bank covenant is 2x.

The level of fixed rate capital was 74% compared to 57% at the half year, and 63% last year. So we've added $265 million in swaps since September, and we continue to add cover as appropriate to stay within policy.

There's a lot more information on our hedging profile in the appendix. Next slide looks at our debt profile.

We refinanced our bank debt twice in FY '26, pushing out tenor to 3.1 years and introducing a new tranche to pay back ARG010 bondholders. Bank margins remain very competitive, as you'll see from the appendix.

Our second green bond matures in October this year, and this will be refinanced with either bank debt or a new bond depending on circumstances at the time. And a final slide from me is on dividends.

We announced this morning a fourth quarter dividend of $0.016625 per share, bringing the full year dividend to $0.0665 per share in line with guidance. As noted previously, the balance sheet is in good shape, with further cash to come from divestments.

As such, the DRP has been suspended for this dividend. The Board has looked at our dividend policy as they do annually.

It's very clear that FO is a much more volatile basis for dividends than a commonly used alternative funds from operations or FFO for short. As such, the Board has changed the policy to maintain dividends between 80% to 95% of FFO, and the Board is fully committed to paying sustainable dividends.

Given current market uncertainty, guidance for FY '27 is unchanged at $0.0665 per share within our target -- new target policy range. So I'll now pass you over to Peter for a leasing update.

Thanks, Dave. Leasing has obviously been challenging, particularly since Christmas working through the beginning part of the year was dominated by lack of activity, very low inquiry rates started to pick up just before the end of the year.

And then, of course, we've been affected by geopolitical events since then. Overall, though, commercial offices have surprised a little on the upside.

We're seeing pretty good inquiry through there. And whilst the time conversion is taking a while, has certainly pushed out, we're not getting any pushback on rental rates and reasonably positive in terms of how that's looking.

Industrial by contrast, activity is there. It does remain slow.

Rentals have remained resilient. So we're not getting any pushback with any of the main lease negotiations we've got for these new high-quality 6-star buildings.

And they've still got face rents at $245 a square meter for the Warehouse, $360 for the office and around $150 for the Breezeway depending on the immunity in there. Incentive rates, though, have pushed slightly, and we're looking at incentive rates around that 12%-ish type area depending on the tenant and the use.

So industrially, we do expect that, that is going to remain reasonably slow over the next 12 months. And as a consequence, we probably won't be pushing development buttons, particularly not until we've got leases in place.

As I mentioned earlier, construction costs are likely to increase 10% to 15%. And so we'll see some constrained activity in that space.

Looking at retail, for us, as I mentioned, the story is very much about the Albany Mega Centre, and we have some very good inquiry over there continuing. Predominantly from international rather than domestic tenants.

Rentals, certainly for Albany Mega Centre are illustrating some upside. Incentives are minimal, but certainly unchanged in that space.

But we do look at that center as having some short-term potential for rental lift and that's being one of the strongest performers in the revaluation round as we start to see some of that come through. We look at the lease expiry profile, let's assume that I do get this agreement to lease through for Neilson Street, then the occupancy by rental improves to 97.2% and the weighted average lease term pushes out to around 5.3%.

So that's an improvement from what we were looking at, at year-end by a reasonable margin just with one significant lease. The largest expiry we've got for the year ahead is the warehouse and 17 Mayo Road.

Now we do know that they will be vacating that building. And we are already in advanced negotiations with a very good quality tenant domestically based who will take that over, we believe.

So that one's looking okay. And the expiry for the March '28 year that is actually a break clause and the Favona Road general distributors lease.

And we don't believe and they have conceded that they need a miracle to be able to enact that. So we do expect that, that one will remain.

It's around 9%. So that brings your total expiry back down to around that favored 10%.

Assume we do get that lease at Neilson Street, this chart does change significantly with obviously a long lease pushing the expiries out. Across the sectors.

I've covered a lot of this, so I'll try not to repeat myself too much. But in the industrial sector, we are looking at a bit of an oversupply, and we expect that, that will take a year or 2 to absorb.

The big change there is the sustainability and the big gap between the current market stock and tenant demand for green buildings. So we are seeing some really good inquiry levels for 5- and 6-star green buildings.

And I think the statistics would benefit if we could actually draw a line between the two and look at them independently. In the commercial office space, we've got really good inquiry continuing in the Wellington office market.

That is principally from a commercial business rather than from central government. But not exclusively interestingly, and it's kind of hard to square that with what we're reading in the newspaper at the moment.

There is a possibility that Wellington office has been over discounted accordingly. The large format retail, retail in general, we would still expect to see struggle.

And the retailers, we've got on the ground floor of the Citibank building would be an illustration of that. So we expect that discretionary spend will be under a lot of pressure, and particularly so in Auckland and Wellington.

We're obviously aware that increase in interest rates has a greater effect in the cities. In terms of where the number of big mortgages are.

And the reality is that many of those areas have not really recovered from the COVID lockdown in the Auckland market. Looking at retail for us, it's very much a case of the rich getting richer, and that's a locational gravity story.

The sector is slimmer than it has been. We're seeing some good product.

And we need to understand that, that is coming from a relatively low base. Sustainability remains a key focus of tenants, and it's really only the retail sector where we don't have strong demand for specifically green space.

It's very interesting when you run the surveys through top of the list is usually energy conservation. But when you go through and ask the actual occupiers, i.e., the staff, their favored benefit of a green building at the end of trip facilities and the air conditioning quality.

So it might be that there's some change coming through there. Turning to the outlook.

Obviously, we're expecting some continued uncertainty. And even if the Strait of Hormuz was opened today, which is clearly unlikely, there's likely to be a gap in our view of at least 12 months, probably longer before we see any form of equilibrium returning to New Zealand market.

We do expect, therefore, there will be little development activity. The sector of stagflation is very real.

Fuel costs, interest rates are not positive for the market, and we do expect to see some flow-through from that. So the reality is it's prepared for the worst and hope for the best.

The portfolio is extremely well positioned. It is nicely resilient.

We've got a terrific tenant base and retention rates are expected to remain very strong. So that's it from me.

We're happy to take any questions.

Firstly, just on your new DPS policy. So in terms of moving to FFO away from FO.

Could you provide some color on maintenance CapEx going forward? Are you expecting that to lift significantly driving part of that decision?

I don't think it's driving that decision, and we'll continue to provide the maintenance CapEx numbers. So the FFO will be available.

You will be able to determine that. It's just the measure by which we're determining the dividend has changed.

Dave might have further comments.

Yes. I mean it's no secret really that -- we moved to an FO 85% to 100% of FO 4 years ago, and it's no secret, we've really struggled with the volatility of the FO adjustments.

I mean, all the below-the-line adjustments for FO are very volatile. And so we've struggled with it a bit.

And when we look back to the last 10 years and compared FFO and FO. It's quite clear that FFO is more stable.

So the Board is quite keen to move to something. It's a little bit more stable.

So that's why we've moved.

And so in terms of your likely maintenance CapEx, are you expecting that to be broadly flat?

CapEx? Yes.

Okay. All right.

And then for FY '27, could you just provide a little bit of guidance around where you expect to be in that 80% to 95% FFO rate.

We haven't provided that guidance. But we're going to be safely in the upper middle is how I describe it.

And then with the portfolio 9% on the rented. How much of that do you expect to capture over the next 2 to 3 years under current market conditions?

I expect we'll get some of it, not all of it. We're going to have to be careful about affordability ratios, how that fits together.

There will be an opportunity to renegotiate lease terms as a result of that. But we're going to have to watch that very carefully, Bianca, to make sure that we don't over gild the lily on the way through.

But a fair chunk of that is contained with solid reviews. So it will be interesting to see what happens going ahead.

We had a presentation from Zoltan Moricz from CBRE just yesterday. He's not expecting to see any rental declines.

But the market remains really uncertain. So I wouldn't want to be too dogmatic on how it fits together.

Just quickly on the guidance. What sort of level of investment have you kind of assumed for '27?

You did say that you've got 1.6 the Neilson Street on Warehouse. So I was just curious how much you're expecting to get from Mt Richmond?

We expect the deduction to be just under $8 million. So tax effective, that's about $2.2 million.

That's awesome. And then just could I get an update on 101 Carlton Gore Road.

It just seems like the NLA went up a little bit, but the vacancy they're almost doubled.

Yes, that was the -- you might recall, we had a lease over the computer part of the floor that has rolled out. So that's effectively now vacant.

Perfect. And then just last one on me.

In terms of the high-level Neilson lease, you did talk to the phase rent was being about $245, which is kind of in line with that basic lease was. But the rental terms on that agreement seemed pretty good, 3.5% of the lots market reviews.

So is that based kind of where you wanted it to get? Or were you kind of expecting higher, but giving up to get better terms?

I would have liked -- I would always like better, of course, but the rental rate, the incentive percentage, they all look fine. It's the gap between now and start that I'm working on.

So it's roughly where we would expect it to be, but it's not as strong as we would really have liked.

Just in terms of divestments, have you got anything else on the market at the moment, obviously, outside of the initial contract you've got on Taupo.

So we've got some interest in the 3 little Wellington industrials, but no real interest in the commercial office buildings around that Nugent Street area. And we don't expect that for a while.

So we've got some work to do there in terms of getting some longer-term leases, and they're not sale at any cost type scenario. But the ones in Wellington, like a reasonably small and a reasonably tightly held market.

So I would expect those to move reasonably soon.

Just remind me, have the sort of noncore assets changed between the last sort of results in here. So I don't think you're actively looking to get out of the Wellington industrial.

Yes. No.

The Wellington industrials aren't regarded as noncore, just as there's been considerable interest in them. So it's been a no change from the half year in terms of what we've designated as noncore.

But they don't include the Wellington industrials.

Right. So anything noncore that is interesting?

The noncore that there's interest in. Not that's what I call, qualified interest.

No.

And then just on Neilson Street. Is it the same discussion as you previously talked about with the July commencement on it?

Or is it something different?

No, it's a different tenant and the commencement date is 1 March of next year, whereas previously, we were looking at a July this year start. So the commencement date has been pushed out from July to March.

Right. And you guys sort of happy with wearing 1.5 years of vacancy in that?

Not happy about it.

We're definitely not happy about it. No.

It remains a bone of contention, so we may get some improvement out of it, but that's not worth sitting at the moment.

Yes. And there's other 2 tenants you're in discussion with sort of in those sooner than that?

Yes. Yes.

One of those is quite a bit earlier. So it's a case of making sure we get the best deal.

Okay. And then just on the dividend policy change based on your sort of historic analysis and view and on a go-forward basis, what do you see the differential between FFO and AFFO payout ratio being.

Obviously, you as with a 5 percentage point difference between...

We looked at it based on our 10-year plan, and we looked at what our projected dividend -- what the projected midpoint of our earnings would be and we looked at what the buffer was left for predicted maintenance CapEx incentives and so on, and there's quite a clear buffer. I bet 85% to 90% range.

So -- sorry, sorry, 80% to 95% range. So that's how we modeled it.

Yes. But I guess what I'm just trying to understand is, on a go-forward basis, is maintenance and incentives more than 5 percentage points of difference.

Therefore, the payout ratios or the payout policies got easier to sustain the dividend?

Have a 10-year planned stuff.

We were within the old policy as well in terms of our 10-year planning numbers.

So I guess that means that it should be around that same, just volatile.

So I was just -- it was comfortably contained within both FO and FFO, our projected dividend profile.

Were there any years that were out of the old policy.

No.

Just trying to square away, again, this policy and the kind of go forward and the potential for payout above 100% of AFFO, which was the top end of your target. If you talk to the upper middle of the FFO range this year and you've got some tax deductions that are one-off because dependent on your developing.

It feels like this coming year, you're suggesting that you would probably be above the old policy on an underlying basis without some of these kind of things that don't really repeat. And then when you look at your historical maintenance CapEx, you've been 15% of FO, and I know there's been some big years in there or maintenance CapEx and the tenant incentives.

It's got quite a big range and there's some very lumpy numbers, so I understand that. But even most recent years have been, call it, 6% to 7%.

And when you, I guess, look under the hood, you probably under on maintenance CapEx versus your historical run rates and tenant incentives because those years were quite -- or periods of quite strong tent demand and you're obviously low tenant incentive. So I'm just I'm just curious around the potential for over-distributing under the new policy range.

I know you've just said you're within the old policy range as well, but it feels like that must be pretty tight.

I think near to impossibly, but we obviously modeled this right out, and we feel that there's sufficient buffer at the midpoint of the new policy range to cover any maintenance CapEx or incentives in any year going forward. So we feel like there will be -- we'll be providing sustainable dividends to shareholders going forward with the new policy.

Well, I mean we've modeled it. There's plenty of buffer there for the normal below-the-line line FO adjustments.

When you look at your capital stack, your debt has come up because you've been spending some money on some projects. You've had the DRP on and you've been selling non-core assets.

Is it trading at a much wider discount now. you've got some interest in maybe not noncore assets, but some core assets.

Do you think that you could be buying back stock given the discount that you're at the moment? And if you do get some of those other noncore assets away, is a buyback on the cards?

It's possible. It's only modestly -- if you're selling assets to buy back stock, it's only modestly accretive really.

So yes, certainly, if developments get stalled and we do sell these assets, and we have a lazy balance sheet, then we would definitely look at a buyback as an option.

The first cap off the rank, of course, Rohan, is turning the DRP off, which is effectively raising equity at a discount at the moment. So kick that one off.

And then I mean, we debated at every board meeting as to what the opportunities are and how we could fulfill those.

I guess that the difference from having a discounted DRP to fund development, which is what you're effectively doing before hand was not very value accretive versus selling assets in buying back your selling assets at book, which you've done for a few things and buying back here on stock if you believe in the rest of the portfolio? And I mean your NTA has been growing for the last 3 years.

So it suggests that you believe in TA. Just wondering kind of that switch seems good for shareholders.

And I wonder if it's something you are going to enact.

I guess I can't go any further than say that when we see the opportunities there, then that would be evaluated against all the other options, but it's always on the agenda, just more so when we're looking at a position where we don't need the capital.

And my last question was just on construction costs. You talked to a 10% to 15% increase.

Materials are about 40% of the cost of a new build depends on the asset that you're building though. But like that kind of implied materials price increase is 25% to 40% given the rest of the market is pretty soft.

Are you seeing that sort of uplift in materials pricing in the market across the board?

Not yet. But we did quite a bit of work with one of the contractors that we don't work with as to what the impacts would be.

And it's not just materials, of course, it's the consumables in terms of the transport costs and operation costs on site. And when you follow that through, you can't help, but land at sort of 10% and possibly even 15%.

My question is '27 will be the fifth year of [ $0.0665 ]. And when we look at your peers in the industrial, they've been over the period, growing their dividends.

So my question is, when can we expect dividend growth again? I know you like sustainable.

But obviously, it's been cut out of CPI over that period as well. So I think shareholders see dilution in that DPS.

So when can we see growth again?

Probably depends on whether you want to take a lead from our CFO or from the Board of Directors. But as soon as we can, look, I think the reality is it's time to be prudent when you look at what the economy is likely to be or potentially going to be over the next 24 months and how that fits together.

We don't want to overpay. We want to make sure we've got a sustainable dividend.

We want to make sure that we've got sufficient buffer that we're not having to fiddle with things to get there. But equally, the level of uncertainty that we're dealing with right across the market at the moment suggests that we should be a little more prudent.

Sorry, I was just kind of a follow-up for Francois, right? Like your net income over that same period divided is been flat is up kind of 15%, 20%.

And I guess, the loss has all been in share count and net debt to fund developments, given you've kind of got this brownfield development strategy kind of going forward. Have you rethought that because it doesn't seem to have added value over the last 4 or 5 years?

Well, I think what you got to appreciate is the rapid and unprecedented increase in interest rates that happened. Our weighted average cost went up by 2%.

And when you're borrowing $800 million, that $16 million of cost, you've got a chew through. And that's something that we've had to struggle with over the last 3 or 4 years, and that's why the dividend has been flat.