DEXUS (DXS) Earnings Call Transcript

Thank you for standing by, and welcome to the Dexus 2021 Annual Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Darren Steinberg, Chief Executive Officer. Please go ahead.

Good morning, everyone, and welcome to our 2021 results presentation. Hope you're all well. And for those of you in lockdown, wherever you are across the globe, I hope you're all keeping safe. Thank you for taking the time to join us today. We look forward to speaking with many of you in the coming days and weeks. We know it has been a difficult time for many people, including our small business customers and retailers that provide the amenity for our office, industrial and health care communities. And we continue to work alongside them at the current time. Before we get underway, I'd like to recognize the agility and efforts of our people. They've done a great job in adapting to the current environment, whether it be working in the office, at home or on-site in our properties and developments. As an owner/manager and developer of property across the country, I'd like to start today's presentation by acknowledging the traditional custodians of the lands on which we operate and pay our respects to their elders past, present and emerging. Today, you'll hear from Alison on the financials, Deb on our funds business, Kevin on office, Stewart on industrial and Ross on investments and our development pipeline. We'll then turn to questions. I'm really happy with what we've achieved this year in what has been a complex environment. The main callouts were growing and diversifying our funds management business through initiatives such as securing approval of the merger of AMP Capital Diversified Property Fund with Dexus Wholesale Property Fund and the approval and implementation of the acquisition of APN Property Group. We maintained high occupancy levels across both our office and industrial portfolios. We were involved in more than $6 billion in property transactions across the group, and our development pipeline also progressed through planning and development completions, including the North Shore Health Hub, which you can see on the slide. Turning to the many highlights for the year. We were pleased to deliver 3% growth in distribution and AFFO per security, well ahead of our expectations just over a year ago. We undertook almost $600 million of health care acquisitions and attracted new investors to our funds platform outside of the DWPF and APN transactions. We achieved positive customer sentiment in a difficult market with our customer Net Promoter Score result in line with leading global brands and progressed our ESG achievements from an operational perspective and across external benchmarks. From a strategy perspective, we have been on a journey over the past 9 years, from which our actions have been navigating us toward a more capital-efficient, multisector real estate platform. This is a natural extension of our long-standing vision to be recognized as Australia's leading real estate company. Our actions supporting our vision throughout the year involved increasing the resilience of portfolio income streams, expanding and diversifying the funds management business and progressing the group development pipeline. These initiatives have now been incorporated into revised strategic objectives to guide the next stage of our business evolution. These objectives include generating sustainable income streams and being identified as the real estate investment partner of choice. Our strategy is supported by the size of our balance sheet, access to pools of capital, our agile culture and our commitment to sustainability. Looking at how we've delivered across each of these objectives. Assets like the new Atlassian tower at Sydney Central and Woodside's headquarters at Capital Square Tower 1 in Perth not only enhanced the quality of our portfolio but are appealing to third-party capital, creating opportunities to grow our funds management business. When you include the build-out of quality industrial projects such as Horizon at Ravenhill, our portfolio is positioned to generate sustainable income streams that provide resilience through the cycle. Our funds business provides capital partners with access to an integrated real estate platform with an experienced team and like-minded investment philosophy. The activity this year has expanded and diversified this business with new vehicles and investors, enhancing our objective to be identified as a real estate investment partner of choice. Turning to ESG, which continues to grow in importance for our customers and investors. This slide shows our achievements across key areas of our sustainability approach for the year, including high employee Net Promoter Score of plus 43, reinforcing our engaged workforce and the establishment of 2 major community partnerships. Recognizing the increasing urgency to act on climate change, we are bringing forward our net 0 emissions target by 8 years to deliver by June 2022. Through this strong action, we will avoid a further 1 million tonnes of the carbon emissions from our original target. This will be achieved through continued investment in energy efficiency initiatives, transitioning to renewables and supported by nature-based offsets. Thanks. I'll now hand you over to Alison.

Thanks, Darren, and good morning, everyone. Despite the ongoing challenges presented by the pandemic and the provision of rent relief to impacted customers, in FY '21, we were able to deliver growth in AFFO and distribution per security. This is particularly pleasing given the initial expectation for a distribution consistent with FY '20 with growth achieved predominantly through better-than-expected outcomes across the property portfolio as well as delayed settlements of asset sales and other initiatives. Turning to the composition of the results. Our property portfolio delivered AFFO of $625.2 million. And excluding the impact of rent relief and provisions, like-for-like income growth improved. Office like-for-like income growth of 2.3% strengthened compared to the half year results and was achieved despite the slight reduction in occupancy we saw across the portfolio. Industrial like-for-like income growth of 3.7% was a good outcome following a year of decline in FY '20, enhanced by strong leasing and increased occupancy. Management operations FFO reduced this year as costs normalized following some nonrecurring cost reduction measures the prior year. This year's result was also impacted by the transition of the Australian mandate and the continued impact of the pandemic on revenue, offset by new funds and other initiatives, which will drive strong growth into FY '22. The trading business delivered an excellent result with $50.4 million posttax profits achieved across 4 projects. The external independent valuations resulted in a total of $584 million or 3.5% increase on prior book values for the 12 months to 30 June with a stronger uplift achieved in the second half of the year. Cap rates drove 89% of the valuation uplift for the industrial portfolio, while they drove 31% of the uplift for the office portfolio. Positively, it was clear through the June 2021 valuations that external valuers had become more optimistic on the outlook for market rents in Sydney. Turning to the components of growth. Office property FFO reduced primarily due to the divestment of 45 Clarence and 201 Elizabeth Street in Sydney, alongside the impact of rent relief and provisions associated with the pandemic. Industrial property FFO was lower due to the full year impact of the divestment of the second tranche of DALT, these impacts were partly offset by income from recently completed office and industrial developments. I've already talked to the reduction in management operations for FY '21. We anticipate strong growth in management operations FFO in FY '22, driven by recent initiatives, including the full year impact of securing the ADPF portfolio and acquisitions undertaken by DHPF in FY '21 as well as the acquisition of APN, which was implemented last week. Group corporate costs increased driven by higher insurance costs and following nonrecurring cost reduction measures in FY '20. Net other income improved driven by a reduction in underlying tax expense. And while underlying funds from operations was lower than the prior year, AFFO was 2% higher, driven by higher trading profits as well as reduced maintenance CapEx and incentives. On a per security basis, factoring in the impact of the securities buyback, both AFFO and distributions were 3% higher, and NTA increased by 5% to $11.42 driven by revaluation uplifts. Moving to rent collections and rent relief for the year. Cash collections were strong at 98.1% and were maintained at 97.6% for the month of July. Looking at the rent release numbers for the full year, we took a conservative position in FY '20 due to the uncertainty about the timing and impact of future lockdowns, and FY '21 has been impacted positively as some of this provision has been reversed. The direct impact on AFFO in FY '21 was $17 million, of which $2.5 million was rent waivers and $14.5 million was further provisioning. As a result of the latest lockdowns and the Code of Conduct implemented in Melbourne and now Sydney, we continue to work on rent relief for those small business customers impacted and, as a result, have factored an assumption into our FY '22 guidance. Moving now to our capital management. We continue to maintain a strong balance sheet with look-through gearing of 26.7%, remaining below the target range to 30% to 40%, and $1.1 billion of cash and undrawn debt facilities. During the year, we bought back 15.6 million securities at pricing ranging from $8.42 to $9.40, taking advantage of market volatility. We also obtained approval to simplify our corporate structure with implementation occurring in July. We have utilized the strength of our balance sheet to support recent initiatives. We take an active approach to capital management. And there remains a range of funding options to support continued growth, including balance sheet utilization, bringing in third-party capital and asset recycling. Thank you. And I will now hand over to Deb.

Thank you, Alison, and good morning. As Darren mentioned, we have grown and diversified our funds management business during the year, attracting new capital partners and undertaking some strategic transactions. Our full-service platform with capability across the spectrum of asset classes is underpinned by a higher standard of corporate governance and a strong performance track record, and these together provide confidence for capital partners to invest with us. We have been able to provide liquidity to those investors who have needed it while also raising equity to support new opportunities. For example, over the past 4 years, DWPF has facilitated $1.4 billion of transfers and redemptions while at the same time, raising $2.3 billion of new equity. Being a trusted partner has helped us grow our funds management business this year, raising new equity across multiple funds and, as Darren mentioned, delivering the ADPF and APN transactions. And so our platform continues to evolve. We now have a diversified group of investors through multiple end vehicle types, providing investment options to suit with appropriate structures. Our relationship with the investors has deepened with recent insights gained through our investor engagement activities indicating the attractiveness of Australia as an investment destination has been maintained with continued significant interest from offshore investors. ESG continues to increase in importance as an investment hurdle, and the consolidation of the Australian superannuation fund industry is driving a preference for more direct and joint venture-style investment opportunities. Our funds management business provides a capital-efficient way to increase our exposure to growth sectors. Our focus on growing and diversifying the business has resulted in funds under management increasing by 61% over the past year to $25 billion across a diversified pool incorporating wholesale pooled funds, listed rates and joint ventures. Our health care fund now stands at more than $1 billion. We have attracted new capital partner, Mercatus, forming a partnership to invest in 1 Bligh Street, Sydney and increasing the group's ownership to 100% of this flagship asset. And we have established our new opportunity fund, DREP1. We're now in the process of integrating the APN funds onto our platform and leveraging our capabilities to support the strategies of those funds and their investors. This slide provides a snapshot of the 20 vehicles across our platform. Our flagship diversified fund, DWPF, has grown to $16 billion, including the ADPF portfolio. We expect to satisfy around $2 billion of redemption requests from existing ADPF unitholders on a pro rata basis over approximately 18 months through the divestment of a number of ADPF assets. And after this has occurred, the funds will be stabled. We remain committed to delivering performance and meaningful ESG outcomes for our investors, and our track record enhances our prospects for attracting further capital. Thank you. And I'll pass you on to Kevin.

Thanks, Deb, and good morning. The Australian office market demonstrated remarkable resilience, both from a capital and occupier perspective. Our CBDs were bouncing back from last year's lockdown, and leading indicators for the office sector were tracking well up to 30 June. The latest government lockdowns have interrupted but not derailed the recovery of our CBDs, with our retailers the most impacted. The knowledge industries, which dominate our city office space, are looking through the current lockdowns with confidence that business can continue through this stage of the pandemic. Many of our customers are experiencing a talent shortage amplified by international border closures and reduced immigration. This has had a constraining effect on white-collar employment growth but bodes well for continued demand when borders reopen. The strength of the recovery will, to some extent, depend on the level of government support to small business through these lockdowns. We've seen a year-on-year improvement in the office NPS, which is considered the global gold standard customer experience metric. Our score this year of plus 49 on the scale from negative 100 to positive 100 is a great result and takes Dexus alongside leading global customer brands. Customer -- strong customer advocacy has underpinned solid portfolio metrics through what was a difficult year in office markets. From the survey and conversations with our customers, it's clear that workplace flexibility is here to stay but to different degrees, depending on the organization. Many companies are forging on with a hybrid or blended model that allows greater flexibility for employees to work from home but where offices continue to play an important role. This could see the core office retained for increased collaboration, more flex space with fluctuations in business activity while experimenting with some work-from-home arrangements to accommodate the flexibility sought by employees. This trend has a way to play out as customers explore how to create the optimal blend of the physical and virtual that delivers truly innovative, inclusive and culturally relevant workplaces. But we are encouraged by data in the latest CBRE Future of Office survey, which shows increased expansion intentions across Asia Pacific companies compared to FY '20. This included countries already dealing with the second wave of COVID-19 infection rates. The current lockdowns have only resulted in a modest slowing of leasing transactions and inquiry across our portfolio. Over the year, most of the leasing activity across our flexible space offer has been the conventional fitted suites. Many of these customers are also taking advantage of the collaboration spaces at Dexus Place. Our business is well placed to accommodate workplace flexibility as it relates to physical spaces through our flexible product offering. Planning for our sixth Dexus Place is well advanced with 80 Collins Street in Melbourne, and we look forward to opening early next year. We're also excited to be working with Atlassian on the delivery of their next-generation workplace that we believe will set a new benchmark for how the office plays a central role in building collaboration, culture and innovation in leading organizations. We look forward to working with our customers as we continue to evolve our portfolio and suite of services to support their ever-changing needs. Moving on to office portfolio performance. FY '21 was a strong year of leasing activity with overall leasing more than doubled last year. This was a great result given Melbourne was in lockdown for much of the first half of the year. Occupancy was maintained above 95%, albeit reducing slightly from the prior year, impacted by extended lockdowns in Melbourne. Incentives were up on last year, with most of the deterioration occurring in the first half of the year. Across our portfolio, Sydney CBD incentives peaked in December 2020 and remained at those levels for the second half of FY '21. The latest lockdown could slow the rate of improvement, but we maintain our prior view that incentives should decline in Sydney and at the premium end, the Melbourne market, into calendar year 2022. Looking at our expiry profile. Space we currently have available is concentrated in Melbourne, where we have made progress and are in advanced negotiations on a number of deals. 123 Albert Street in Brisbane has been removed from our stabilized portfolio due to the impending development works there, which results in our expiry levels being below our target threshold of 13% for the next 5 years. We are pleased with our progress on many of our near-term expiries, including the 383 Kent and 44 Market Street in Sydney and look forward to providing updates on these in the coming months. Our diversified tenant base presents limited concentration risk, with our top customer, the State of Victoria, representing just 4.5% of income and our top 10 tenants combining -- combined representing 18%. Activity in the portfolio has provided us with confidence that office markets will continue to improve in the year ahead. A number of industries appear to have recovered from the impact of COVID-19 with demand in Sydney relatively strong across the technology, professional services, finance and government sectors. The SME suite market was buoyant throughout FY '21 with a very strong fourth quarter. We've seen increasing levels of inquiry for sub 1,000 square meter spaces, which were well up on FY '20, with spaces above 1,000 square meters being only moderately higher. Outside of lockdowns, decision-making time frames are also improving. There have been a number of examples of organizations centralizing into CBDs from a diverse range of industries. In our Sydney portfolio, we have secured a number of customers centralizing from locations such as North Sydney, South Sydney, Wetherill Park, Pyrmont, Ultimo and Sydney Olympic Park. Also worth noting is until the most recent lockdowns, the physical occupancy of some of our buildings, including 1 Farrer Place and Australia Square in Sydney, was much higher than the Property Council market average. It seems conversations around the future of work haven't diluted the importance of well-located, high-quality office space as our customers continue to invest in leading workplaces. Thanks. I'll hand you over to Stewart, who will take you through industrial.

Thanks, KG, and good morning, everyone. Looking at the performance of our industrial portfolio, where we had an exceptional year of leasing activity, leasing up double the amount of space to 445,000 square meters. Occupancy has hit a 3-year high at 97.7%, driven by strong leasing in the core logistics portfolios as well as in the business parks, including Axxess Corporate Park and Lakes Business Park North. Our weighted average lease expiry also improved to 4.4 years. This result reflects the strength and location of our assets as well as the consistency and intensity in our leasing efforts. Incentives were up on last year, driven predominantly by deals in the business parks, and like-for-like income growth was a healthy 3.7%. Our portfolio delivered a 1-year total return of 23.5% to 30th of June and outperformed its benchmark over the 3- and 5-year periods to 31 March. We're developing new income-generating products at speed. And on completion, our group industrial portfolio should grow to $9.4 billion across 3.4 million square meters, further improving portfolio quality and WALE. Looking more closely at what's driving demand. The industrial market has gone from strength to strength and is well on track for another strong year. Notwithstanding, recent lockdowns will affect confidence temporarily. The online growth story continues with economic tailwinds from government stimulus feeding demand from e-commerce, retail, essential services, pharmaceuticals and infrastructure customers who are looking to grow their industrial footprint as they establish or expand their platforms. Dexus has been quick to capitalize on the convergence of the retail and industrial sectors with our ship-to-shop shelf model, taking into account our customers' retail and industrial needs is the one deliverable; cementing partnerships with expanding omnichannel and pure-play e-commerce businesses signed this year, including Amazon, Myer, Hello Fresh at Ravenhall, ACR Supply Partners and James Lane at Richlands and Winit, an asset at South Granville. Importantly, our understanding of what is important to our customers from a geographic and colocation point of view has been key in our acquisition to master planning and leasing strategies. This ensures we have the right customers in the right locations populated in designs that meet the highest market expectations with customers that need location and proximity to each other. This further ensures customer stickiness and, hence, optimal investment performance over time. Thank you. And now over to Ross.

Thanks, Stewart, and good morning, everyone. It was an enormous year for the group in terms of transaction activity, which is a credit to the agility and dedication of the platform given many of the offices were in lockdown for extended periods and the asset teams were focused on managing the COVID impacts. We are focused on working the portfolio hard, both in terms of how we manage the assets but also divesting assets and recycling capital into higher-returning opportunities. We moved early in the pandemic, bringing forward some planned asset sales to enhance our financial strength at an uncertain time, all with an eye to ensuring that we can organically fund the significant pipeline of growth opportunities in our development and funds businesses. As you can see, we've been very active in redeploying capital into opportunities across a range of sectors and strategies, all of which we believe offer attractive risk-adjusted returns. For the balance sheet, we have contracted or completed $2.3 billion of sales and committed $3.1 billion into new assets and projects. Looking at a recent example, we've sold 10 Eagle Street in Brisbane, which is expected to generate a 2% AFFO yield over the next 3 years. And we acquired Capital Square in Perth on an AFFO yield of around 5%. There has been a real focus on health care real estate, including the $180 million strategic investment with Australian Unity, along with opportunities to develop high-quality core real estate like the Atlassian commitment. And we continue to invest capital to support the growth in our funds business, including the $450 million investment to unlock the ADPF deal for DWPF as well as our investment in APN. While we were naturally cautious and moved quickly on divestments early in the pandemic, we have been encouraged by the strength and depth of private capital markets for high-quality office assets. We expect this will provide us with the opportunity in the year ahead to sell good assets at decent prices, but these are assets which we can replace in our development pipeline and generate high returns in the process. And this takes us to our portfolio of city-shaping office development projects, which are the cornerstone of the development pipeline, which has grown to over $14 billion. The Atlassian opportunity, which adjoins our existing project at Central Place Sydney, both captured in the image on the right, is an exciting addition to the pipeline. Atlassian are keen to push the boundaries of what the future workplace is and how it works, and this is going to provide some great learning opportunities for our entire platform. These 4 projects alone represent $5.2 billion of investment opportunity for the Dexus balance sheet and $3.1 billion of additional growth for our funds business with commitments expected to be drawn from 2022 onwards. As Kevin mentioned, customers are looking to invest in their workplace to ensure it supports their ways of working in the postpandemic period. And having iconic projects in prime locations is going to be an important part of meeting the future needs of our customers. Development is an attractive way for us to access high-quality product, enhance returns and organically grow our funds under management. We have a diversified pipeline of projects across all the major property sectors, including health care. For the balance sheet, we completed industrial and office projects with an end value of circa $600 million at an average margin of over 23%, and we added circa $600 million to third-party fund from development completions. In addition, 3 health care and 8 industrial projects have been added to the pipeline, which has a combined value of over $1.7 billion. And for the balance sheet, this represents projects with an end value of circa $1 billion. The trading business, as Alison mentioned, will be developed for a profit as distinct from developing long-term core assets to hold, made another strong contribution to earnings with $50.4 million of posttax profits in FY '21. We've already secured $25 million to $30 million of pretax profits for FY '22 and have a healthy pipeline of opportunities we are looking to add in the year ahead. And this includes 3 opportunities currently under our control and 2 in exclusive due diligence. Before I hand back to Darren, I did want to make a brief comment on the investment strategy for the group and lay out how we see these activities supporting a very robust strategy to deliver enhanced returns from high-quality core Australian real estate without materially changing our risk profile. As many of you know, Dexus is an investor, manager and developer of high-quality core Australian real estate. We own some of the best assets in the country. Our capital is predominantly invested in core real estate, which generates stable but low returns. These returns are enhanced when we invest alongside third-party clients where we can generate a range of recurring management fees. At $17.5 billion, we have a big balance sheet. And as you heard from Deb, we have a significant and growing funds management business. This provides us with a real near-term opportunity to enhance the returns from our core investments as we increase the proportion of fee-paying third-party capital that invests alongside us. To give you some context, today, we have about $1.40 of third-party fee-paying capital for every dollar we have invested in core real estate. We think that can easily be $2 to $3 in the near term, which is the assumptions that underlie the calcs on this slide. And there is scope to grow this materially higher over the longer term. Development is also an important activity to enhance returns. And from a risk perspective, almost all of this activity is developing core real estate, which refreshes the long-term investment portfolio and provides inventory to grow our third-party funds business. And while we have a modest amount of current capital committed, circa 3.5% of the balance sheet, this will steadily increase in the coming years as we activate the significant pipeline. And we expect returns will also increase, albeit with some timing lag. Thank you, and I'll now pass you back to Darren.

Thanks, Ross. We are well prepared to continue to deliver for our investors. We have built a fully integrated real estate platform and are focused on better leveraging our cross-sector asset management and development expertise to drive more capital-efficient returns for investors. We are remaining true to our identity as a long-term investor in high-quality Australian real estate. And our diversified funds business with long-term partnerships continues to attract capital, providing secure income with embedded growth through annuity-style income and a significant development pipeline. All of this is enabled by our quality people, scalable and efficient operating platform and strong balance sheet. In summary, the continuing cycle of lockdowns will have an impact on business and consumer confidence. We have demonstrated our ability to capitalize on opportunities while also being able to address challenges. Recycling assets over the past year has enabled us to maintain the strength of our balance sheet while allocating capital towards new investment opportunities that offer strong growth prospects. We are confident of being able to deliver long-term performance beyond the recovery due to our scale and capability across traditional and emerging real estate sectors; our funds management business, which provides a capital efficient way to increase our exposure to growth sectors; and our substantial city-shaping development pipeline. Taking all of this into account and based on current expectations relating to COVID-19 impacts and barring unforeseen circumstances, we expect to deliver distribution per security growth of not less than 2% for the 12 months ended 30th of June 2022. Thank you. I'll now open up the lines for questions.

[Operator Instructions] The first question today comes from Tom Bodor from UBS.

I was just interested in the office portfolio returns versus the MSCI index, and that was about 1.5% to 2% lower than the index for the year. I was just interested in what was driving that and how that impacts your ability to raise capital in the funds business.

All right. Kev, do you want to take that one?

Yes. Primarily due to overweight position in that time -- [ 1 to 1 and 3 ] time periods for -- in Sydney and Melbourne, where we've got significant allocation. Also, there was a couple of cyclical larger expiries, which -- and some development-affected assets which impacted that. Yes, we see that returns to a more normal footing in the 24 months ahead.

Thanks, Kevin. I think that the other couple of things to note is that last year's underperformers tend to be outperformers in the coming years. And the other key point is that the capital -- the private capital is not looking in 6 months and 1-year returns. They're looking in 5- and 10-year-type returns.

That makes sense. And then just on 123 Albert, just wanted to understand the plans and the status of that expiry and what you're looking to do in terms of repositioning that asset and what is up there.

Ross or Kev, one of you want to pick that up?

Yes. I'm happy to. So in terms of the scope of works, it's really focused around the ground plane end-of-trip, making sure that the amenity that's in that asset is going to be, I guess, relevant for, I guess, the customer base that we're looking to attract there. There's also a bit of ACP cladding that needs to be removed as part of that work. And hopefully, it will be back online from June 23 is sort of our working assumptions at the moment.

And the status on negotiating with potential tenants for that?

Kev, do you want to pick that one up?

Yes. We've had a number of conversations with some key tenants. We'll hopefully give you some more color on that by -- in the half year, but we're looking to get going on that project later this year. And yes, we'll give you some more color in February.

And then just one final one around the redemptions in ADPF. Just was interested in where sort of you see the retail assets and the sale process, sort of what's the outlook for that. I think you talked about sort of reasonable interest. But can you elaborate at all on that?

No. Look, I think as -- clearly, we've entered into an agreement that we'll be placing some of the retail assets on the market in the back half of this year. And we will see how that plays out in due course.

The next question comes from Simon Chan from Morgan Stanley.

First question is just in relation to your guidance. I was hoping to get into some assumptions behind it. The rent relief that you factored in, Alison, I assume it would be to SMEs. So I could take the June 2020 half as a good benchmark with City Retail shutting down, et cetera. Is that right?

Simon, yes, I think that would be a good assumption. I mean, clearly, there's still a lot to play out and still a bit of uncertain. But yes, that's probably a good benchmark to use for now.

Great. And in that guidance, have you guys factored in the deployment of the $400 million for the ADPF liquidity?

Yes, we have.

Has that money actually been spent yet or it hasn't been spent?

No, not yet. We're still working through that. But in terms of guidance, we've considered that we will eventually spend that, yes.

Great. Terrific. And then I just noticed, the maintenance CapEx number, traditionally, it's been in the 160s. 2020 was a bit higher at $179 million, and then 2021 was $155 million. I'm just trying to understand, is this kind of the right -- the new normal number now because you've turfed some assets such as Grosvenor and Clarence Street? Or is -- was FY '21 just an abnormally low year?

Yes. FY '21 is a bit abnormal. Don't forget, as part of the rent relief provisioning that we've made, there is an adjustment that we put through that AFFO CapEx line. And so for this -- for the year FY '21, it was actually a benefit. So you got a benefit of circa $9 million in that number. So without that, CapEx would have been back at the $164 million number. And I think what I would say for next year is it's probably more likely to normalize. So as you know, CapEx is normally 1% to 1.5% of assets. Next year, it will go back to more normal, I would say.

Right. Sorry, just on -- that $9 million is essentially a reversal of FY '20. Is that right?

That's correct. Yes, that's exactly right. Yes. Yes.

Yes. Cool. And just a final -- just operation question, it's probably for KG. Just interesting, though, the percentage of your GLA that's actually being sublet by your tenants at the moment across your portfolio. And also, can you comment on the leasing spreads, probably face rent leasing spreads? Are they still in positive territory?

Yes. Simon, the sublease proportion is about 1.7%. But -- and that's coming down. We think it's going to be a lot lower. With a number of the customers that we're speaking to, it seems they're going to -- either subleasing or withdrawing some of what they've had on the market. So we expect that to potentially be lower at the half. On the spreads, the effective spreads overall were down at almost 8%, 7.9%, but the face spreads were actually up by 7.1%. So it's reflecting higher base rent growth, obviously, and the big incentive movement you saw, particularly in the first half of the year.

The next question comes from Sholto Maconochie from Jefferies.

Chan, you got some good ones in there, but I've got a couple left. Just on the -- so we take that sort of June '20 half as our benchmark for COVID assistance. In the gearing, I think the 26% that's got a footnote, that hasn't got the post-balance asset sales. Does that include the APN payment acquisition in there as well or not for that gearing calc?

Alison, do you want to take that?

Yes. Sure. No, I don't believe so because we've probably paid post 30 June for that. So -- yes.

So do you have the -- I don't -- I'll work it out later. But do you have the number pro forma for the settlement of Grosvenor and Miller and APN? What -- it would probably be broadly unchanged. I mean, it'll be probably a bit lower given APN was low.

It would be -- I think -- yes, I imagine it would be a little bit low. I don't have it with me, but we can get it to you.

I'll work it out. But yes, we'll talk later. And then just on the redemptions that you provided, you haven't any liquidity yet. What are you sort of seeing? The leasing, I noticed, for KG, was pretty strong, and that it was slightly up on the first half, about 94,000 meters. Obviously, you've had lockdown since the end of June. What -- do you think -- what does this do for leasing momentum? Does it sort of get pushed back into December and then -- or a second half story? What are you seeing on the leasing front since the lockdown, given it was pretty strong to June?

It's a good question. It's interesting that we haven't really seen a noticeable drop-off, as I mentioned in my remarks, in inquiry and the transactions. It has been slowed a little bit because access for inspections has been restricted. So it's feasible that there will be some slowing into Christmas, depending on the duration of the lockdown. But I think the encouraging thing, I suppose, if we look at what happened in the last lockdown period is that the bounce back in the market was very strong in Sydney and even in Melbourne when they came out of lockdown. So the activity really did pick up lost ground rather quickly as soon as restrictions came off. So I think I'm optimistic that whatever ground we might lose is just -- it's a moment in time and that the balance of the second half of the financial year will see us recover pretty strongly through the end of the year.

Yes. And then just maybe for an accounting question. On the APN acquisition, do you -- for the look-through interest in the funds, will you report them in management operations this year? Is it like included in that line item? Or will there be a separate line item?

It's Alison. We'll probably include them in that line item, I would say. But as you know, we do have quite a lot of other kind of co-investment income growth now. So we might look at how we present all of that. But for the time being, yes, it would be in that same line.

Okay. Great. And then just finally, on the industrial side of things, leasing still seems pretty strong like your peers. Is that correct?

Stewart?

Yes. Correct, Sholto. Yes, the leasing momentum is good. You see our renting position is winding down pretty hard in portfolios, and the rental growth in Western Sydney and Southwestern Sydney, in particular, has been really good.

And then on the guidance on the growth of at least 2%, if you didn't have the lockdown, you just add back that number that you're -- or whatever, the $15 million, whether the number was in the second -- in the June '20, the $26 million, would that be sort of what you would have likely guided to if you didn't have these lockdowns, like $26 million higher?

I think you can see it would be a lot stronger than the 2% that we'd put out.

The next question comes from James Druce from CLSA.

Darren and team, just following up from Sholto's and Simon's question around guidance. So is the message that you're sort of talking to is funds management materially up, got a bunch of acquisitions, divestments. Can you just remind me of the settlement time frame for Grosvenor? And just the messaging around trading profits for the next 12 months. Is that going to be -- looks like a softer year there?