Argosy Property Limited

Thank you for standing by and welcome to the Argosy Property Limited FY26 Annual Results Webcast. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Peter Metz, CEO. Please go ahead.

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 in Iran and the return of non-productive 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 It's very much a site specific issue. The rich getting richer, the better locations 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 is 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 their valuations accordingly. So what we're seeing is rental growth surprising on the upside in a couple of locations. particularly at 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, obviously the vacancy rate is a bit higher than we would have liked. That is going to change significantly when we get this Nielsen 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, we're still seeing reasonably good investment demand from domestic buyers. If you're talking internationally, far less so. They're far more concerned about geopolitical events and so on. But domestic buyers are surprisingly firm, noting that there is some reasonable degree of appetite for a level of risk in that. So it's not only the vanilla assets that we're seeing interest in 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 in the bar 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 proportion of end 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 10-15% 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 Nielsen 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 award. So that was really positive. 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 two others who are already at an advanced stage of negotiations. Sorry we can't deliver a confirmed deal, but it's looking fairly close. 8 to 14, Mount Richmond Drive. Not a lot to talk about in a development that actually achieved all its targets. We have a very happy tenant with possession of the premises. Everything has gone very, very well, and the six green star rating has been confirmed on that asset. I'll move on to get Dave to talk about the financials.

Thanks Peter and hello everyone. The first slide from me is the gross property income waterfall. Gross property 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 annualised increase of 3.1%. 25% were market with an annualised increase of 4.8% and 3% were CPI with an annualised increase of 2.8%. The amount being reviewed in FY27 is even higher at $109 million with 60% of those fixed. There was a solid contribution too from the acquisition of 291 East Hamergy Road and the completed and leased warehouse B development at 224 Nelson 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 non-recoverable rates increases in Wellington and optics on vacancy more than offset insurance savings. Our insurance cap 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 covered off the revaluation gain which included a $4.4 million gain on the two health for sale properties, Four Hennessy Place in Onehunga and 143 Lamping Quay in Wellington. We'll talk about tax in 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 is 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 Nelson Street. Offsetting this was lower deductions on development, leasing and incentives, lower depreciation and lower deductions for appeasement, maintenance and fit-out disposals. On a pre-shared basis, net distributable income was $7.05 per share compared to $6.58 per share last year, up by 7.1%. The next slide covers adjusted funds from operations, or AFO. AFO adjustments are reasonably consistent with last year. Amortisation 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, only due to more tenant fit-outs and a HVAC replacement at Favona Road. So AFO was $59.1 million. compared to 54.6 million last year, an increase of 8.3%. On a first year basis, AFO was 6.85 cents per share compared to 6.43 cents per share last year. The dividend payer 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 two assets. As I mentioned, capital spending was mainly on Mount Richmond and the completion of 224 Nelson Street. So the portfolio, after deducting the right of use asset in respect of 39 marketplace, was valued at $2.2 billion at 31 March. The next slide looks at debt to total assets. So the balance sheet's 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 our for sale assets in April and May. We have another non-core property under conditional contract currently. It's Peter Meason. That's the property on the corner of Tunny Farr and Pottery Happy Streets in Taupo, and that property is expected to settle in October this year. On top of the Taupo property, there are a further five properties regarded as non-core. with a combined book value of $129 million, which we expected to best over the median term. Next slide covers interest rate management. The bankruptcy 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. The interest cover ratio has also improved 2.7 times from 2.5 times last year, and the bank carbonate is 2.6%. The level of fixed rate cover was 74% compared to 57% at the half year and 63% last year. So we've added $265 million in swaps in 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. The next slide looks at our debt profile. We refinanced our bank debt twice in FY26. pushing out tenor to 3.1 years and introducing a new tranche to pay back our ARG 010 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. The final slide from there is on dividends. We announced this morning a fourth quarter dividend of 1.6625 cents per share, bringing the full year dividend to 6.65 cents 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 AFO 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 80-95% of FFO and the board is fully committed to paying sustainable dividends. Given current market uncertainty, guidance for FY27 is unchanged at 6.65 cents per share within our 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. It 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 six-star buildings. And they've still got face rents at $245 a square metre for the warehouse, $360 for the office, and around $150 for the breezeway, depending on the amenity 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 centre as having some short term potential for rental lift and that's been one of the strongest performers in the revaluation round as we start to see some of that come through. If we look at the lease expiry profile, let's assume that I do get this agreement to lease through for Nielsen 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 in 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 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 in the Fibona Road General Distributors Lease. And we don't believe, and they have conceded, that they'd 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 rate of 10%. Assume we do get that lease at Nielsen 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'll take a year or two 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 five and six 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 enquiry continuing in the Wellington office market that is principally from commercial business rather than from central government but not exclusively interestingly and it's under 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 live 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 increasing 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 was 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 favoured benefit of a green building are 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'll be little development activity. The spectre of statulation 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 hoped 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.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Bianca Murphy with UBS. Please go ahead.

Good morning, guys. Firstly, just on your new DPS policy, so in terms of moving to FFO, moving away from FO, could you provide some color on maintenance capex going forward? Are you expecting that to live 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 FO policy 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.

Yeah, I mean it's no secret really that we moved to an AFO 85% or 100% of AFO four years ago and it's no secret we've really struggled with the volatility of the AFO adjustments. I mean all the below the line adjustments for AFO 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 AFO, it's quite clear that FFO is more stable. So, you know, the board are quite keen to move to something that's a little bit more stable. So that's why we've moved.

Okay. And so in terms of your near-term maintenance cap back, are you expecting that to be broadly flat?

Cap back, yes.

Okay. All right, and then for FY27, could you just provide a little bit of guidance around where you expect to be in that 80% to 95% FFO range?

We haven't provided that, guys, but we're going to be safely in the upper middle, is how I'd describe it.

Okay. That's helpful. Thank you. And then with the portfolio 9% and the rent it, how much of that do you expect to capture over the next two or three years under current market conditions?

I'd say 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'll be an opportunity to negotiate, 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 overgild the lily on the way through. But a fair chunk of that is contained with solid reviews, so it'll be interesting to see what happens going ahead. We had a presentation from Zoltan Moritz from CDRE just yesterday. He's not expecting to see any mental declines, but the market remains really uncertain, so I wouldn't want to be too dogmatic on how it fits together.

Okay.

All right, please sit for me.

Thanks, Dan.

Thank you.

Your next question comes from Vishal Bhulla with Jarden. Please go ahead.

Morning, guys. Thanks for the presentation. Just quickly on the guidance, what sort of level of investment boost have you kind of assumed for 2017? You did say that you've got 1.6 for Nelson Street on Warehouse A, so just curious how much you're expecting to get from outrichments.

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

Perfect. Thanks. 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 there almost doubled.

Yeah, that was the... You might recall, mate, we had a lease over the computer part of the floor that is rolled out. So that's effectively now vacant.

Perfect. And then just last one on me. In terms of the high-level Nelson lease, you know, you did talk to the base rentals being about 245, which is kind of in line with where that basic lease was. But, you know, the rental terms on that agreement seem pretty good. You know, it takes 3.5% off the list in market review. 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 have always liked better, of course, but the rental rate, the incentive percentage, they all look fine. It's the gap between now and start date 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.

Perfect. Thanks. That's all from me. I'll give someone else a chance. Thanks, mate.

And the next question comes from Nick Marr with Macquarie. Please go ahead.

Morning. Just in terms of the decimates, have you got anything else on the market at the moment? Obviously, outside of the initial contract, you've got cotton tarpon.

So we've got some interest in the three little Wellington industrials but no real interest in the commercial office buildings around that Mugent 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 are reasonably small and have reasonably tightly held market. So I would expect those to move reasonably soon.

Yes, just remind me, have the sort of non-core assets changed between the last sort of result and here? I don't think you're actively looking to get out of the Wellington industrial.

Yeah, no, the Wellington industrials aren't regarded as non-core, just as there's been considerable interest in them. So there's been no change from the half year in terms of what we've designated as non-core, but they do include the Wellington Industrials.

Right, so anything non-core that there's interest in?

I think the non-core that there's interest in. Not at this stage? Not that's what I'd call qualified interest, no.

Okay, that's fine. And then just on Nielsen Street, is it the same discussion as you previously talked about with a July commencement on it, or is it something different?

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

Right, and you guys sort of happy with wearing, you know, a year and a half of vacancy in that?

Not happy about it. 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 where it's sitting at the moment.

Yeah, and those other two tenants you're in discussion with are sort of no sooner than that?

Yeah, I'm... 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've

There's 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 buffer was left for predicted maintenance capex incentives and so on and there's quite a clear buffer. I'd say an 85% to 90% range. So... Sorry, sorry, yeah... 80% to 95% range. So that's how we modelled it.

Yeah, but I guess what I'm just trying to understand is, you know, on a go-forward basis, is maintenance and incentives more than 5 percentage point difference here for the power ratios or the power policies got easier to sustain the development?

I have a 10-year plan stuff with me, but, you know, 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 5% just as volatile.

So 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. Okay. Thanks a lot.

Your next question comes from Rowan Cormans-Mitt with Forsyth Bar. Please go ahead.

Hey, guys. Just trying to square away, again, this policy and to kind of go forward in the potential for payout above, you know, 100% of AFO, which was the top end of your target. You know, if you talk to the upper middle of the FFO range this year and you've got some tax deductions that are, you know, one-off because dependent on you developing, it feels like, you know, 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 AFO. And I know there's been some big years in there for maintenance capex and tenant incentives. It's got quite a big range and there's some very lumpy numbers, I understand that. But even the most recent years have been, you know, call it six to seven. And when you I guess look under the hood, you're probably unders on maintenance capex versus your historical run rates and tenants' incentives because those years were quite... were periods of quite strong tenant demand and obviously low tenant incentives. So I'm just curious around, you know, 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, you know, that must be pretty tight.

I think near-term, possibly, but... We obviously modelled 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 we'll be providing sustainable dividends to shareholders going forward with the new policy. I mean, we've modelled it. There's plenty of buffer there for the normal, below the line AFO adjustments.

OK. And when you look at your capital stack, you know, your debt's come up because you've been spending some money on some projects, you've had the BRP on, you've been selling non-core assets, and the sector's trading at a much wider discount now. You've got some interest in maybe not non-core assets but some core assets. Do you think that you could be buying back stock given the discount that you're at at the moment? And if you do get some of those other non-core 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 to create it 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 Rowan is turning the DRP off which is effectively raising equity at a discount at the moment. So check 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.

The difference from having a discounted DRP to fund development, which is what you were effectively doing beforehand, was not very value accretive, versus selling assets and buying back your own... You know, selling assets at book, which you've done for a few things, and buying back your own stock if you believe in the rest of the portfolio. And, I mean, your NTA has been growing for the last three years, so I would suggest that you believe NTA. I'm just wondering, kind of, you know, that switch seems good... for shareholders and I wonder if it's something you are going to enact.

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. 10% to 15% increase, materials are about 40% of the cost of a new build, depending on the asset that you're building though, but that kind of implied materials price increase is 25% to 40% given the rest of the market's 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 impact 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%.

Okay, cool. Interesting. Might talk about that more in our one-on-one. Anyway, I'll leave it for someone else. Thanks.

Your next question is from Dee Canult with ANZ. Please go ahead.

Hi, good morning. My question is, 27 will be the fifth year of 665. And when we look at your peers in industrial, they've been over that 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 called a CPI over that period as well. So, I think Shell does, you know, 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, mate. 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

Thank you.

Once again, if you wish to ask a question, please press star 1 on your telephone. We'll pause a short moment to allow any final questions to register. Thank you. You have a follow-up question from Rowan Coleman-Smith with Forsyth Bar. Please go ahead.

Sorry, it's just kind of a follow-up for Francoise, right? Like, your net income over that same period is up kind of 15%, 20%. And, you know, 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 four or five years.

Well, I think what you've got to appreciate is the rapid and unprecedented increase in interest rates that happened, you know, our weight average cost of debt went up by 2%, and when you're borrowing $800 million, that's $16 million of cost you've got to chew through, and that's something that we've had to struggle with over the last three or four years, and that's why the dividend's been flat.

Okay, thank you.

Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.