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Operator: Thank you for standing by, and welcome to the Argosy Property Limited FY '26 Interim Results Conference Call and webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Mence, CEO. Please go ahead.
Peter Mence: Thank you, and welcome. Thanks for joining us for this presentation for the F '26 half year results. The results, with due respect to Sean Fitzpatrick, very much looked like a game of 2 halves. The first few months were very much characterized by a lack of activity and very little lease inquiry. This gave way quite abruptly in the end to a significant increase in inquiry levels and more recently, to significantly improved activity. Moving through to the results summary on Slide 5. The revaluation at $31.3 million was principally driven by the extended lease of 9 years to MBIE at the Stout Street development. Now you'd be aware that I've been talking about that for some time. It actually took just over 5 years to negotiate, but it includes a reasonably exciting decarbonization project, which is jointly conceived between Argosy and MBIE, and we'll be starting work on that fairly shortly. The NTA lifts slightly on the strength of that revaluation to $1.56 and the gearing sitting just above the midpoint in the target range. We're pretty comfortable at this point in the market to be at the upper end of that range with some sales still to come. We've reached agreement to sell 143 Lambton Quay, usually known as TPK at book value and that will remove the vacancy from that building. The sale is to a private buyer. It is expected to be unconditional prior to the Christmas break, not much time left for that. And it's expected to settle before the end of the financial year. Vacancy is obviously a little higher than we would have liked, but with the significant increase in inquiry levels that we're now fielding, there is cause for optimism in the year ahead. We have still been realizing some rental growth on the way through and the 9-year extension to MBIE has obviously had a good positive impact on the weighted average lease term being the largest lease in the portfolio. The tenant retention rate remains solid, but we often see that in a quieter market where tenants are more likely to stay put than to look at a change. On Slide 7, the weightings are showing actually little change since I last spoke to you. They remain target -- close to the target levels with current activity in terms of sales and development moving us closer to those targets. The revaluations were characterized by a lack of evidence with respect to both sales and leasing. But post balance date activity is suggesting a market in line with the valuations with some evidence of the expected firming in the cap rates driven by the lower interest rates, albeit that that's relatively modest at this point. The economy in general remains relatively weak in both Auckland and Wellington, and there remains a risk that there will be tenant failures, although thus far, these have been significantly fewer than we had expected. Of note, there is that the cap rate comparable for the last year excludes the Marketplace building as this was only valued on a discounted cash flow basis at that time being largely vacant. This building has seen some significant change. You will have been aware of the change in the earthquake-prone building announcement that the government is working through. That has resulted more quickly than we had expected in a change to the tenant interest in NBS ratings. Obviously, that is a big positive for this building. And as a result, we've seen a significant increase in lease inquiry and recently signed 2 additional tenants into the building. The value-add and green developments, Mt Richmond is progressing as planned with no orange lights so far. Both the building platforms have been completed and leased to existing tenants elsewhere in the portfolio. But of the rest of the list in that value-add schedule, there is nothing that is pending out of those properties over the next 12 months. Forward inquiry for the Mt Richmond site has improved in line with the market, but there's nothing to announce at this point. Looking at 224 Neilson Street, both buildings have been completed on budget, on program, and we're very pleased with the quality of the construction, thanks to Haydn & Rollett on those sites. The first building, obviously, was leased when we last announced. The second building, we've just moved to agreement to lease stage with a very good quality logistics operator on a new 10-year lease, and we have a backup negotiation still current. So pretty positive news on that one. It is fair to say that prior to October, leasing inquiries were sparse, and that was concerning at that time. It has been much welcomed to see the increase in inquiry levels coming through. With 8-14 Mt Richmond, the project is literally smack on target. It's progressing well. There is now no further leasing activity required for this development on site with both the platforms and the building that's under construction all committed. We did well with value increase on the land prior to the development, and we expect to make solid profits on the remainder of the development, thanks principally to a very strong location. I'll hand over to Dave to take us through the financials.
David Fraser: Thanks, Peter, and hello, everyone. So the first slide from me, as usual, is the gross property income waterfall. So gross property income was $69.4 million compared to $66.6 million last year, up by 4.1%. There were some strong rent reviews in the period, and there's more detail on that in the appendix as usual. Most reviews were fixed with an annualized increase of 2.6%. 29% by rent were market reviews with an annualized increase of 7.7%. Income from developments offset the effect of the disposal of Forge Way in March of this year. So on to the next slide, net profit for the half year. Net property income was up by 4.9% on the prior period at $61.2 million. The property expenses were slightly lower as rates increases were offset by lower insurance charges. Our insurance captive has been a very successful initiative and allowing us to market to reinsurers directly. In particular, we've seen some reasonable reductions in premiums for the Wellington market, which you'll know as gross. Expenses were flat in the period. Management expense to NPI improved to 9.2% from 9.8% in March and the management expense ratio improved to 51 basis points from 56 basis points at March. Net interest expense was down on the prior period. Lower rates and higher capitalized interest more than offset a negative volume variance in the period. Peter's covered the revaluation gain, and we sold a small sliver of land at Ti Rakau Drive for $230,000 in the period. We'll cover off tax in the next slide, but net profit after tax was $61.1 million compared to $33 million in the prior period. The next slide covers net distributable income. After the usual fair value adjustments, gross distributable income was $36.8 million compared to $31.6 million last year. That's up by 16.4%. Current tax expense was $6.1 million compared to $4.1 million last year. This is mainly due to higher taxable profit. There's been a lot of information published about the government's investment boost program. There was little impact from this at the half year, but we'll receive a $5.7 million deduction in the second half of this financial year as a result of the practical completion of Warehouse A at 224 Neilson Street. So last year, we were complaining about the removal of depreciation deductions on buildings, but we're obviously a lot happier this time around. So on a per share basis, net distributable income was $0.0358 per share compared to $0.0325 per share last year, up by 10%. And this slide covers adjusted funds from operations or AFFO. The AFFO adjustments were reasonably consistent with the prior year. Maintenance CapEx is up by $1.1 million, mainly due to a number of smaller office fitouts across the portfolio. So AFFO was $29.6 million compared to $26.8 million last year, an increase of 10.4%. On a per share basis, AFFO was $0.0345 per share compared to $0.0317 per share last year. The next slide covers the movement in investment properties. Investment properties increased by $70 million compared to March '25. As Peter already talked about the reval gain of $31 million. The balance was mainly spending on developments, principally Neilson Street and Mt Richmond. The portfolio after deducting the right-of-use asset in respect of the ground lease at 39 Marketplace was valued at $2.2 billion at 30 September. The next slide covers debt to total assets. The balance sheet remains in good shape, and we have capacity to complete developments and acquire assets as evidenced by the recent acquisition of 291 East Tamaki Road, which is a very exciting future development opportunity, and this property settled in October. The debt to total asset ratio was 35.9% at 30 September compared to 35.7% at March and 37.2% at 30 September last year. As at 30 September, 7 properties were regarded as noncore with a book value of $148 million, and we'll sell these properties as conditions allow. And Pete's already mentioned one sale that we hope to complete this year. The next slide covers interest rate management. It's been great to see rates continue to decline during the period. Our weighted average cost of debt reduced to 4.8% compared to 5.1% at March. The interest cover ratio improved slightly to 2.6x, well above the bank covenant of 2x. The level of fixed rate cover was 57%, down from 63% in March. And we continue to add cover as appropriate, and we've added 3 swaps in October to a value of $80 million at around the 2.5% mark. So we'll provide a lot more color on our hedging profile in the appendix. The next slide looks at our debt profile. We refinanced our bank debt during the period, pushing out tenor, including a new 7-year tranche of $100 million. The nearest bank expiry is now October 2028. Bank margins remain extremely competitive, as you'll see from the appendix. The nearest green bond matures next March, and we'll refinance that later this financial year. And the final slide for me is on dividends. We announced this morning a second quarter dividend of $0.016625 per share with imputation credits of $0.002633 per share attached. The record date is 3 December and the payment date will be 17 December. There's no change at this stage to the full year guidance of $0.0665 per share. The DRP remains open for shareholders to participate in. I'll now pass you back to Pete for a leasing update.
Peter Mence: Thanks, Dave. I guess most importantly is the leasing environment has been challenging, but has recently improved, is looking a lot more promising for the year ahead. A couple of the ones that really stand out that we did achieve. Obviously, the MBIE lease extension dominates this half year result. And there was also a 6-year extension of the New Zealand Post lease at 7WQ. So we've got quite a bit of activity still coming through in that space. And what is really notable if we look at the forward demand is the deficit of certified green space that is going to be evident in the market over the next 3 to 4 years. This is particularly so in the industrial space, but also with commercial offices in both Auckland and in Wellington. It's really only large-format retail where we're seeing virtually no demand for sustainably rated space. Looking at the lease expiry profile. Clearly, this has changed a lot with the MBIE lease dominating this chart for the last 6 years. So pushing that out by the 9 years has made a big difference to that. And obviously, it leaves the March '27 year with modest expiries. The year through to March '28, the largest expiry there is General Distributors or Woolworths at the 80 Favona Road property in Mangere. Now -- we've obviously been working with general distributors on the way through that. And the reality is that we are not expecting them to be able to leave during that time. So they will still ultimately depart the site. It will still ultimately be a redevelopment, but the expectation is that, that expiry will be pushed out into later years. So it's certainly not on the current site. Once that is taken into account, then we're sort of looking at that 10% or less for the next 5 years. So not a big leasing demand coming forward. Looking at the 3 principal sectors, as I mentioned, overall, the expectation is a deficit of supply of certified green space for both industrial and office. Large-format retail is actually performing relatively well at this stage. For us, that is principally the Albany Mega Centre, where we're going through some remerchandising. We've recently opened the new JD Sports facility over there. That is trading extremely well and has provided some additional gravity to the site. In addition, we are in the process of -- in fact, we have conditional lease agreement for food operators over there, and we have managed to re-lease pending vacancies with a trade up on the site. So that site is going pretty well. Turning back to the industrial space. We are looking at a period where demand is returning. That activity is now evident, and it is interesting that it is dominated by international tenants. And as a result of that, we're seeing that increased demand for green-rated space coming through. So we do expect to see '26 being a busier space in industrial leasing. In the office space, the trends that we've been looking at over the last few announcements continue in terms of organizations looking to adjust the workplace to encourage office workers back in. I don't know any CEOs in the portfolio who don't want all their staff back in the office 5 days a week. We are conscious that we'll be moving into an election year when we come back from Christmas. That characteristically in Wellington gives us a quieter period, particularly with Crown tenants, but we've had very little activity from Crown tenants in Wellington over the last year in any event. Wellington potentially is overdiscounted at the moment. We do have excellent inquiry levels for our building at 147 Lambton Quay with around 5,000 meters of space available in that building. There's only one 500-meter floor that we don't have negotiations on currently. So qualified inquiry is very strong for that building. Obviously, that is from nongovernmental tenants. So turning to what we're looking at for the period ahead. The domestic economy is expected to gradually improve. And the reality is that it is still relatively challenged in both Auckland and in Wellington at the present, but inquiry levels and activity levels are improving. The interest rate situation is obviously positive, and the expectation is that we will ultimately see cap rate compression as a net result of that. Certainly, we're starting to see just in the last 2 months, increased levels of inquiry, particularly from offshore. Dave's mentioned insurance levels. But as premiums fall, that is also a positive for the market, and we're seeing that start to come through in the interest levels. So we're still dealing with relatively strong bottom-up fundamentals with the industrial sector. And with both industrial and commercial in Auckland and in Wellington, we've been dealing with a period of relatively modest supply levels, and that should be positive for us over the year ahead. So looking forward, the calendar year for 2026 should see a gentle return to business for the sector. And it's fair to say that Dave and I and the Board are reasonably comfortable with the way this business has weathered the last recession. Happy to take questions.
Operator: [Operator Instructions] your first question comes from Vishal Bhula from Jarden.
Vishal Bhula: A couple of quick ones for me. Just with your NPI coming in at $61.2 million, I mean, it's up 5% on the PCP as well as second half '25. There was no acquisition activity in the half, and you did lose the rental from Forge Way as well as maybe some rental on the Mt Richmond development. So the growth here just seems really strong. Is there anything specific to call out? Like was there any one-off income from 4 Henderson Place or anything like that?
David Fraser: Yes. There's 2 things to call out. One is a significant rental uplift from one of our tenants in terms of a rent review, which flowed through into this year. And also, we did receive a surrender payment in respect of an industrial tenant. So in terms of the NPI line impact was $1.1 million. But the good news for that particular property was that we were able to re-lease the property within a month. So it's something of a bonus, I guess.
Vishal Bhula: No, perfect. And then just on your office occupancy, you've put it in the presentation at 91.6% by income when at FY '25, that was 88%. But on a vacant space on a square meter basis, you've got 25,000 vacant space versus 15,000 at '25. So on an occupancy basis, you're down to 83% from 88%. So I just don't quite get how those percentages can be up on an income basis.
Peter Mence: I think, Vishal, that will be principally down to the 143 Lambton Quay building, where it was effectively over-rented.
Vishal Bhula: No, thanks. That clears that up. And then maybe could we just get a bit more color over 143 Lambton and that sale process that you know that is currently conditional?
Peter Mence: Yes. I'm not -- I'm pretty tight. So I can't tell you a hell of a lot more, but we do have an agreement for sale sitting there around book value. It is a very short due diligence period. And the domestic private buyer knows the building very well.
Vishal Bhula: I won't push more on that then. And then just a couple of short ones for me. Just East Tamaki, are those capital works now finished? And is it still 58% occupied?
Peter Mence: Yes. The works are now finished. It did take a lot longer, and you'd be aware that we struggle with a delayed settlement from the vendor unable to meet their obligations. But -- so we've got that through now. Leasing activity is pretty good on that site. Inquiry levels are good and strong. So we're not expecting that to cause any particular issues for us. Obviously, they tend to be shorter-term leases because it's a development site for us and because it's secondary quality buildings that are sitting on the site, obviously. So we tend to get shorter-term leases from that, and that is having a negative impact on the weighted average lease term as it currently sits.
Vishal Bhula: And then just a last one on me. Your guidance, there's no mention of the payout range this time around, whereas previously, you were expecting to be towards the top end of your policy range. Are you still kind of targeting that or the investment, those benefits coming through kind of see you push down to the middle of that range?
David Fraser: Well, I think it will be in the top end of the range, but below 100%.
Operator: Your next question comes from Nick Mar from Macquarie.
Nick Mar: Just on Stout Street, can you just talk through what the potential rental step-up is at the market review that's coming up next year?
Peter Mence: So we've got a rental review pending. I can't go into too much detail, obviously, on that at the moment, but the expectation is for a good solid lift out of that. But we've treated that completely separately to the renewal documentation.
Nick Mar: No, that makes sense. And then in terms of the CapEx that you're spending, how did you look to, I guess, rentalize that as part of the process?
Peter Mence: That's been a 5-year project working with MBIE in terms of what they wanted to achieve with the building and how we were able to add value. It really is the total being greater than sum of the parts. So it's been full disclosure with them on the way through with the work that we wanted to do, the results they wanted to see and how we rentalize that on the way through. So very much part of the negotiation over the 5-year period to make sure that it's stacked up.
Nick Mar: Can you give us an indication of what rentalization rate you effectively achieved on the $13 million?
Peter Mence: I'm looking at Dave, and he's not looking at me.
David Fraser: Well, I mean, the reversion that Pete is talking about is about $1 million is what we're expecting in July next year, and the capital spend is about $13 million. So you're looking at it...
Nick Mar: But did Pete just say that that's a separate impact versus the renewal in itself because [indiscernible] market view?
Peter Mence: Yes. So it's both, Nick. Obviously, the market rental has to be landed out of the reversion rental for the upgrade to the building.
Nick Mar: So you're saying that, that $1 million is on top of the market rental?
Peter Mence: Yes, that's right. Obviously, you're looking at -- just so we're clear, we're obviously looking at a situation in Wellington where market rentals have actually declined marginally over the last 12 months.
Nick Mar: Yes, but it comes down to the time between the last reviews...
Peter Mence: You're all over it, Mate. Well done.
Nick Mar: Yes. Okay. And then on divestments, you've taken a few other assets to market, particularly some of those new market assets. Can you just talk us through what's happened there, whether they're still in train or whether you've pulled them given lack of demand or anything else?
Peter Mence: Yes. It's fair to say that we didn't get a great response. The numbers that we got were less than book value, looked at it and said, hey, there's no urgency to move these assets at the moment. They're still yielding quite well and the risk wasn't there. So we -- they remain on the sales list. We've pulled them from active marketing. If the market looks the way I expect it to look when we come back, we'll probably relaunch those to the market in February. So the intent is still to move them on, but not at any cost.
Nick Mar: Did your updated book values reflect the feedback from the market on them?
Peter Mence: Yes, yes. As I think I mentioned earlier -- I hope I mentioned earlier, the valuers have really been dealing with a paucity of evidence as at September. It's only really since September that we've seen any improvement in the activity levels.
Nick Mar: Okay. And then just on valuations, have you got any initial indication of the amount of seismic allowances that are sitting in the portfolio, which may be removed as the sort of new earthquake legislation moves through?
Peter Mence: Yes, that's a slightly tricky one to address. Obviously, as far as this building is concerned, then you're dealing with a straight removal because there's no requirement to do that. But with the change in the seismic rules, it's important that we all remember that, that doesn't actually change the NBS rating at all. It changes the obligation to do anything about it. So what has been surprising, I think, is the degree to which the leasing market has stopped focusing on that in the Auckland market. So the requirement to actually do it commercially is probably less. But where you have a situation where you've got a building that is less than 50% NBS, that doesn't actually change its NBS rating. And in circumstances, tenants may still require that upgrade to go through. So it's very much a case-by-case analysis. It is this building principally where you're simply drawing a line through it because it's a ground leased asset. And therefore, it is only the building with a lease expiring in 2039, it is cash flow management. So there is no requirement to spend any money on the building at all.
Nick Mar: And as context, what kind of delta is sitting in that building?
Peter Mence: This building -- the pure seismic upgrade was expected to be around $18 million.
Operator: Your next question comes from Bianca Murphy from UBS.
Bianca Fledderus: So first question is just around your comments around inquiry levels picking up significantly so far over the last couple of months. And I know it's still early days, but could you just talk about how much of that interest is actually turning into signed leases?
Peter Mence: Yes. Good question, Bianca. At the moment, we've had some really good results, but I don't know whether that's generally reflective of the market. We've had Intrepid Travel moving downstairs in this building. We've recently signed an architectural practice for the other end of the building. So there was a lot of improvement in inquiry levels, but it's only relatively recently that we've actually seen that lock away. It's only relatively recently that we actually signed the first lease up at 147 Lambton Quay. So it's -- inquiry levels obviously have to come first. We had the improved inquiry levels for, say, 8 weeks before we actually started to get results, but the conversion rate looks like it's improving over the current period.
Bianca Fledderus: Okay. That's helpful. And then just on your interest expenses. So yes, pleasing to see that drop, of course, as a result of lower rates and higher capitalized interest. Can you give us a sense of where you expect interest expenses to land for the full year?
David Fraser: Well, it's going to come down further because -- if you look at our most recent rollover of our -- of the 90-day rate we rolled over in September, the base rate was sort of 3.1%. When you look at the base rate now, it's under 2.5%. So -- and we've got over $300 million of floating debt at the moment. So rate is going to keep coming down, actually, which is obviously a huge positive for the business.
Operator: [Operator Instructions] Your next question comes from Rohan Koreman-Smit Forsyth Barr.
Rohan Koreman-Smit: Just going back to that AFFO, you said you'd be at the top end of the policy range. Are you not taking the investment boost deductions through AFFO? Is that how we should read that?
David Fraser: No, no, we are. We are.
Rohan Koreman-Smit: [indiscernible] down further, what's the other moving part there to offset $6 million of deductions?
David Fraser: Well, there's -- the offset is things that are going to really going to move into next year. So we've got lower repairs and maintenance deductions than normal because the lease to Neilson Street, the incentives to that lease may move into next year. There's a number of other things that impact the tax line, which effectively will flow through into next year as opposed to this year.
Rohan Koreman-Smit: And you mentioned Mt Richmond, I guess, the first building plus Stage 2. You said it was committed. I think what's the comment there, but there's 2 pad sites, right? You haven't committed to building sheds on those pads yet, have you?
Peter Mence: No, no. So what is committed is the first building Viatris that is obviously leased. Then we created the building platforms for 2 further buildings, and we said at the full year result that we wanted to get those completed and leased. So those have been leased as hardstands, not as buildings.
Rohan Koreman-Smit: Okay. Okay. So they're leased as hardstand. So that suggests that development leasing is a bit slower contrary to other comments around pickup in leasing inquiries if you're prepared to lease those as hardstands because unless you've got some development break clause, I was just wondering about inquiry and when the, I guess, CapEx -- the balance of the CapEx at Mt Richmond because there's a reasonable chunk there may kick off.
Peter Mence: Yes, there is -- look, Mt Richmond is going exactly as per the plan. Obviously, it's a progressive development that we've been looking at pulling those buildings in. And it's probably fair to say that current inquiry is stronger than we would have expected, but we still don't see that we'll be moving ahead faster than we planned on that site. So the reality is that things like the DRP are going to pay for that development pipeline as it comes through.
Rohan Koreman-Smit: Okay. And on that, you're talking to cap rates improving, leasing seems to be going well. There's good tenant demand. You expect to be able to sell noncore assets. Do you think the DRP is being overly conservative at this point in time? It's just a very expensive way to raise money where your share price is?
David Fraser: Well, it's not expensive actually. I mean the current share price, very, very limited discount. You're applying that to brand developments, it's accretive. So I would argue that it's not an expensive way of raising capital at all.
Rohan Koreman-Smit: Okay. We'll have to agree to disagree on that one. And then just last one, Marketplace. The previous strategy was to sell it to a -- or potentially turn it into a hotel, I believe. But now you're leasing it up. Has the earthquake rules materially changed, I guess, how you view the exit on that building?
Peter Mence: The earthquake rules have materially changed the way we view the exit on the building, yes. So obviously, it's going to be a lot more feasible to manage the cash flow into a positive situation through until 2039. But we looked for a hotel conversion on this. We had really good demand for it, and then it went completely flat. And the same happened in 143 Lambton Quay, where that building we felt was going to make a very good hotel. All the designs came through looking really positive. And then the hotel market, especially in Wellington, went completely flat. I think government travel -- government-related travel in Wellington was down 54%, I heard yesterday. So that market simply got removed from us. The -- obviously, the -- we did put quite a bit of work into the seismic review situation to try and get a more rational risk-based approach, and that's been extremely positive as far as this building is concerned.
Rohan Koreman-Smit: And then last one, just on 147 Lambton Quay, I believe that's in that noncore pipeline, but has a decent amount of vacancy. You talked to some potential inquiry. Kind of how do you see that one progressing given it is kind of probably a net drag on the earnings at the moment?
Peter Mence: Yes, I expect it will turn into being a positive very shortly with the solid lease inquiry that we're fielding at the present. So expect that will be fine, but it remains on the sale list. It's just not in the immediate future.
Operator: There are no further questions at this time. I'll now hand back to Mr. Mence for any closing remarks.
Peter Mence: Very good. Well, just to say thank you very much for joining us. We've put these results together, as I said, very much a game of 2 halves, and we're expecting that the period ahead will be quite remunerative. Obviously, with the interest rates coming down, the expectation is that cap rates will firm and recent research suggests that, that is already happening. So it will be a case of seeing what sort of evidence we've got by the time we start doing the 31 March valuations, but the indications are positive at this point. Thanks very much.
David Fraser: Thank you.
Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.