Stoneweg Europe Stapled Trust (SET) Earnings Call Transcript

Welcome to today's full year 2022 results for the Cromwell European REIT. My name is Simon Garing and Shane Hagan, the CFO, is delighted to be here too today. So if we can turn to the Montage on Slide 2 of the results presentation that you can find uploaded on either our website today or the SGX website. We'll run through this presentation and then obviously have a Q&A at the end. So as a reminder, the Cromwell European REIT, which we'll refer to as CEREIT is the largest SGX-listed REIT with a resilient EUR 2.5 billion, providing investors exposure to predominantly Western European logistics and office. We own a barbell of core assets through the value-add assets, taking advantage of our active asset management team and track record in adding alpha to the portfolio and for Unitholders. Our pivot to logistics continues now at almost a 50% weighting. So turning to Slide 4, a snapshot of the result. We are pleased that in CEREIT's fifth year since listing, we have delivered an excellent set of results, underpinned by higher net property income especially in the Light Industrial/Logistics segment, 1.3% DPU growth year-on-year and the portfolio's record occupancy of 96% are the 2 key headline numbers that we are pleased to report today. Shane will discuss these results in more detail. So moving to Slide 5. The graph here shows the portfolio has seen a steady rise in occupancy with consistent positive rent reversions over the periods. It was a big year of leasing, with almost 0.5 million square meters or 26% of the portfolio. We recorded an overall 5.7% portfolio rent reversion. In particular, the leasing pace increased in the second half with approximately 16% of the portfolio re-leased or renewed during the period at a 7.6% rent reversion. Turning to Slide 6. Even throughout the pandemic years, we have executed the transactions extremely well. Since the beginning of 2020, we have completed almost EUR 430 million worth of logistics acquisitions across Western Europe, notably in Germany, Italy and more recently, Copenhagen on a 6.2% NOI blended yield. We've increased the Light Industrial and Logistics allocation to 46% and reaffirm our strategy to continue to move to majority weighting. However, given the current macro environment, we have put a pause on acquisitions to now until greater visibility on asset price transpires and CEREIT's cost of capital improves. We were successful in disposing of EUR 41 million of assets at a 20% premium to previous book value. Turning to Slide 7. As part of our efforts to consistently derisk the portfolio, no one industries trade sector makes up more than 14% of the portfolio. For our debt investors on the line today, we highlight that the top 10 tenants now account for less than 30% of the portfolio, helping to reduce that concentration risk that we know the rating agencies value. 92% of CEREIT's income is backed by government-linked and MNC or large domestic corporation tenants, providing income resilience and almost 100% cash collection with no material change in debtors throughout the year. I want to spend a little bit more time now on a new slide that we've presented today on Page 9. We wanted to give you more color on the investment strategy and how we think about funding our initiatives while in this period, the cost of capital remains higher than normal. 46% of the current portfolio is Light Industrial and Logistics, including 8%, which are earmarked for development such as our current Lovosice project in Czech Republic or Parc des Docks in Paris. 22% of the portfolio is considered core grade A offers predominantly in the poor Dutch markets. There is another 13% of older, but well-located office assets that we are in various stages of major upgrades or redevelopments such as Via Nervesa 21, currently underway in Milan. We have identified and commenced disposing of around EUR 400 million or 19% of the portfolio to be staggered over the next 2 to 3 years to free up capital headroom to match the funding of the EUR 250 million redevelopment pipeline while also keeping our gearing within our covenants and our Board policy range of 35% to 40%. The sales program is a continuation of our program to recycle assets that we commenced a number of years ago. The near-term earnings may be impacted, however, while we dispose of these yielding assets to fund the projects, which are obviously typically 1 to 2 years in length before the higher yield on costs and development profits contribute then to the bottom line. To be clear, we're not becoming a developer per se. We will keep this program below the MAS development limits of 10%, and we won't be out land banking. The sites are all existing assets of CEREIT and won't needed to be acquired of the sponsor. Ultimately, we plan CEREIT's long-term portfolio to build enhanced quality, future-proofed and relevant for tenant space needs, landing on an asset class with roughly 60:40 ratio between logistics and Grade A office all organically sourced. The number of assets should decline or the average size of each asset should increase improving the operating efficiencies as well. Slide 11 now shows the approximate time line of some of these major projects noting the substantial Parc des Docks Paris project is not included in the EUR 250 million pipeline and is still a couple of years away from receiving all of the required approvals. Its size and scale is substantial in the middle of the new Paris Olympics [ place constituency ], which you can see on the bottom right-hand picture, and this is a very high-profile project in Paris. In the meantime, we're enjoying very strong income returns from this asset. So not in a complete rush here. Turning to the next page. Our efforts to integrate sustainability into all aspects of our business were recognized through the very meaningful upgrades in key ESG ratings that came through over the course of the year. We received a double-notch upgrade in the MSCI ESG rating to AA placing CEREIT as only 1 of 4 Singapore REITs to attain such a high rating. More recently, Sustainalytics assigned CEREIT as the lowest ESG risk rating of negligible risk. In addition to ranking first in its Sustainalytics selected peer group, CEREIT is also in the top 300 out of 15,000 ranked companies globally by the agency and in the top 20 out of the 450 REITs, not bad for only being around for 5 years here in Singapore. It's again, a testament to the very long track record of the European team on the ground. CEREIT also maintained its Green Star status in the GRESB assessment for the third consecutive year, scoring a record 79 points overall increased by 3 points year-on-year and we outperformed the Global and European averages and also placed second out of the European listed peers. I'll now hand over to Shane. Thank you.

Thanks, Simon. Good morning. So as Simon already stated, CEREIT results showed an improvement on the prior corresponding period, mainly due to acquisitions as well as inflation indexations resulting in higher rental income. This was partially offset by lost income from developments and divestments, and there were higher operating expenses, of which a considerable portion of these were recovered from tenants through service charge income. There is also an increase in the effective current tax rate from about 6% to 9%, which increased current tax expense considerably. DPU growth would have actually been closer to 10%, if not for the divestments, the higher nonrecoverable OpEx and the higher effective tax rate. Once again, the pivot to Logistics was vindicated with NPI from this sector, increasing almost 24% year-on-year. In comparison, office NPI was 9.7% lower due to a weaker office performance in France, Poland and Finland. CEREIT's other sector outperformed this year due to an improved performance from the hotel and the one retail property in Italy. Interest expense, as expected, was approximately 13% higher due to, firstly, a higher debt balance year-on-year, higher Euribor rates as well as a slightly higher margin on the new debt facilities recently established. Total return was impacted by the fair value loss on investment properties, which I'll talk more about later. And as Simon mentioned, DPU 1.3% higher year-on-year after including a EUR 2.1 million payout of realized capital gains in lieu of the lost income from the redevelopment of the Milan property, Via Nervesa 21. Okay. Talking about operating expenses. So obviously, inflation has impacted on CEREIT's operating costs in FY '22. With service charge expenses and nonrecoverable expenses increasing by almost 23% year-on-year. The main driver of this has been utilities, which increased by over EUR 9 million and that was mainly due to higher electricity costs. It is pleasing to note that a significant proportion of these expenses are able to be passed on to tenants through higher service charge invoicing. Overall, there was a close to EUR 4 million increase in total nonrecoverable expenses that negatively impact on DPU. And this is due to a number of reasons. There is a small service charge leakage from temporary vacancies in 2 of our larger properties in Haagse Poort and Business Garden and higher property taxes repairs and maintenance and letting fees year-on-year, also partly due to the acquisitions that have been completed. Now looking at NPI. This chart shows the positive impact that the pivot to logistics has had on NPI growth. With that sector's contribution increasing to 47% of the portfolio NPI in the fourth quarter of '22, and that's up from 34% 2 years ago when we started to embark on this strategy. On a like-for-like basis, the Light Industrial/Logistics NPI was 5% higher year-on-year largely driven by broad-based rental growth and higher occupancy, particularly in the Netherlands. CEREIT's 4Q net property income growth of 7% year-on-year was primarily led by the 21% growth in the Light Industrial/Logistics sector from the new acquisitions. So a dividend distribution of EUR 8.494 has been declared for the second half of 2022. That's euro cents, obviously. And that distribution is a 100% tax-exempt. The distribution includes EUR 0.9 million of realized capital gains for the half year to offset the loss of income from Nervesa. And we still have remaining over EUR 12 million of realized capital gains that have not been paid out yet. The ex-distribution date is 3rd of March, my birthday, and currency election notices need to be returned by the 20th of March. Distribution will be paid out to Unitholders on Friday, the 31st of March. And once again, this year, we have decided not to turn on the distribution reinvestment plan. So looking at valuations as at 31st of December, we conducted valuations for 112 out of 113 properties. The one recently acquired property was accounted by Directors' valuation, which was its purchase price. On a like-for-like basis, excluding acquisitions and CapEx and acquisition costs, CEREIT's portfolio demonstrated its resilience with only a modest 1.6% fair value decline compared to the valuation recently done at 30th of June. The valuation decline was mostly driven by higher cap rates on the back of higher interest rates in Europe and especially in the U.K. CEREIT's Logistics portfolio recorded a small gain driven largely by income growth and continued strong occupier fundamentals more than offsetting the cap rate decompression. U.K. was impacted higher interest rates and a weak exchange rate, and the Netherlands was impacted by cap rate decompression and also some short-term vacancy and a shorter way of, office portfolio valuations declined on the back of increased vacancy and reduced WALE and particularly due to the weaker office sector trends we're seeing in Finland and Poland. Overall, the portfolio is valued at a net initial yield of 5.7% and an improved reversionary yield of 6.9%. So I just want to show a little bit more detail on net initial yields. And this slide shows the net initial yield of the CEREIT's portfolio sectors over the last 4 years, and we've compared it to interest rates, we've taken the German 5-year bond. So you can see there that the net initial yield has not moved significantly even through the COVID period. Today's relatively high spread to interest rates provide some downside protection. And as I mentioned, it's pleasing to see that, in general, the value expectations of ERV growth and asset enhancement initiatives in the CEREIT's portfolio have helped to offset the cap rate decompression due to the rising interest rates. However, in the U.K., valuations have been most impacted due to the economic conditions there. And also cap rates for prime low-yield big box logistics have significantly decompressed in Europe and CEREIT has not been investing in these prime logistics assets. Turning to the balance sheet. CEREIT's balance sheet has remained resilient with EUR 35 million of cash and cash equivalents and only EUR 41 million drawn against the EUR 200 million RCF facility. So although current liabilities are slightly higher than current assets, mainly due to the EUR 50 million term loan facility, which matures at the end of this year. We are confident of meeting near-term obligations as we have various sources of funding, including the Revolving Credit Facility, I mentioned, and also a new EUR 70 million term loan, which is expected to be signed very soon. NAV was EUR 2.42 following payment of the first half distribution and the fair value decline in investment properties in December. On the treasury front, I'm pleased to report the EUR 180 million refinancing that was done and also hedging transactions completed, which really have reduced significantly the risk. And we are pleased to introduce OCBC, HSBC, QNB and RHB as new lenders to CEREIT for the 4-year sustainability-linked facility that we signed in November. And I also just mentioned about the imminent signing of a new EUR 70 million facility, which is also sustainability-linked and it's with the consortium of existing bank lenders. The loan will repay the remaining 2023 expiry with the rest to pay off against the RCF. And we've already informed about our blend and extend of our interest rate cap book. So EUR 210 million of notional interest rate cap at a 60 basis point strike result in over -- in about 78% of the total debt being hedged and fixed to the end of 2024 and this cap is currently having a fair value of over EUR 10 million at the end of the year. So key financial indicators are remaining resilient and really continue to support the investment-grade rating of BBB- by Fitch. Aggregate leverage was a notch higher at 39.4% due to the fair value loss recorded. However, it remains well within loan covenants with about 14% headroom on the LTV covenant and interest coverage ratio remains high at above 6x based on excluding debt establishment costs and as well in excess of the covenants for the loans and the EMTN program. As at 31st of December, the weighted average term to maturity of the debt stood at 2.9 years, and the all-in interest rate increased to 2.38% that's based on a 3-month Euribor of 2.123% (sic) [ 2.132% ] at 31 December. And as a scenario, if the 3-month Euribor increases to 3%, then the all-in interest rate would increase marginally to 2.62%, and this would have approximately 2.5% impact on DPU. And with that, I'll pass back to Simon.

Thanks, Shane. So let me now run you through some of our portfolio and asset management highlights for the back half of the year. The chart on the right-hand side shows the portfolio weighting by country. The 4 major markets are about 75% of the portfolio. That's obviously the Netherlands, Italy, France and Germany and collectively underpin the resilience and the core profile of the portfolio. The occupancy reached a new all-time high of 96%, 1% point increase compared to a year ago. The WALE for the overall portfolio remains unchanged at 4.6 years. And the strong 7.6% blended rent reversion in the second half was driven by these new leases and renewals across both asset classes, office and logistics and particularly so in Paris. In the second half of the year, 143 new leases and renewals, comprising 340,000 square meters was secured or around 18% of the portfolio's NLA. The tenant retention rate in the second half stood at 51%, slightly lower rates due to the impact of a slightly softer fourth quarter tenant retention in part because of the Italian government termination of its lease in Rome, which is now being redeveloped and will be repositioned into a Grade A office. So that was a planned exit. Turning to the next page. In addition to the leasing of the 26% of the portfolio last year. The teams have also leased or renewed 61% of the leases that break or expire in the first half of this year. So that's, again, putting us into a really good position coming into the new year. Zooming in on the Logistics sector on Page 24, occupancy has climbed to a record 98.1% up even in the quarter from 97.5% at September. Occupancy in Parc des Docks has increased from 92% to 96%, with over 7,000 square meters of new leases signed in the units in the last quarter. This particular leasing success saw the valuation of that key asset increased by 1.4%, notwithstanding Shane's earlier comments about the overall portfolio taking a small decline. And the asset management team in Copenhagen has once again delivered several leasing successes, as you can see in the previous page, with substantial pickup in occupancy in that portfolio now sitting at over 93%, which also boosted the valuations of that portfolio and underpin the confidence we had in our recent additional acquisition. Turning to the next page. Not only do we have a very low vacancy rate in our logistics portfolio at 1.9%, this is in line with the average 2.4% market vacancy rate in the countries that we invest in. The average quarter-on-quarter market rent growth in the markets was around 4% in the last quarter, based on the latest CBRE figures, again, supporting our rent reversion and valuations. The ongoing structural trends in this sector support the growth accelerated by the geopolitical pressures for the near-shoring and now friend-shoring production back into Europe. We will continue pivoting CEREIT's portfolio to this sector and leverage the strength of the experience on the ground teams to tap into this increasing demand, but also underpin some of our development opportunities, which I'll talk about in a minute. This slide just runs through a number of leases, which we can take more questions offline. We're just conscious of time, skipping through to this page. This just highlights on Slide 27. A major asset in Copenhagen, about 20,000 square meters in Priorparken, where we've successfully repositioned an older asset to attract a state-of-the-art technology and E-sports production studio as well as other related industry tenants, obviously paying substantial rents. And it's great to see many Singapore Secretlab chairs stored here in ahead of the Blast games. We have made good progress in our EUR 15 million expansion project in Lovosice Park in the Czech Republic to refurbish 2,500 square meters of an existing building and developed 5 warehouse units with a lettable area of about 15,000 square meters. Pleasingly, on completion of the first building, a tenant has already moved in and 2 out of the 5 new warehouse units have already been pre-let with the German 3PL, and we're in advanced negotiations for the remaining 3 warehouse units, covering around another 9,000 square meters. I should note that this project is also targeting a BREEAM Very Good certification, increasingly tenants in the logistics space now seeking this type of certification. Parc des Docks in Paris continues to undergo several more phases of preconstruction planning and design. We are targeting building permits and commercial terms to be agreed with the local municipality and Paris City Hall around 2025 post the Paris Olympics, when we expect the construction costs to normalize. And again, in this photo image, you can see, again, the great position where of we see this asset being repositioned to. We're currently in what we described as master planning Phase 3. We're currently in discussions around the size of the project in terms of the NLA and we plan to sign a Memorandum of Understanding later on this year. That will then confirm the maximum lettable area. Suffice to say, it will be a significant repositioning. On to the next page, I'll go through now a quick snapshot of our office portfolio. Leasing activity picked up pace in the second half with almost 50,000 square meters, roughly about 70% of the total leases through the year. And importantly, 5.8% rent reversion, again, driven primarily by this demand for Grade A office space, which we continue to see in our portfolio. Really notably, a major oil company which we announced in November as the latest addition to our roster of over 800 quality tenants, have signed a 10-year lease agreement for approximately 4,000 square meters at a 36% rent reversion last year and then more recently signed an additional 2,600 square meters on the same terms, again for 10 years. This now leaves only 700 square meters of vacancy in our largest office asset. The occupancy stats will reflect this new lease from August 2023 when the new tenant takes occupation. We are also in positive discussions with the 2 largest tenants in the building on extensions to their 2025 expiries. We have exciting plans to also upgrade this asset's credentials to match both ours and the large corporate tenant aspirations, which we haven't included in our EUR 250 million refurbishment pipeline. This will obviously be additive and accretive once we've secured the commitments. Overall, year-end occupancy of the office portfolio dipped slightly to below 90%, including this new -- excluding this new lease, I should say at Haagse Poort. As a side note, we are in advanced sales process for 2 Warsaw office assets to buyers with conversion to alternative use strategies outside of our core strategy of office and logistics and to the office subsector, the WALE also increased to 4.1 years. So on Slide 31, taking you quickly through the major Grade A cities that we invest in both leasing activity and rent values continue to grow positively. Office take-up rates are heading back to pre-pandemic levels, have been increasing for the last 7 periods and office vacancy rate remained stable at 8.8% as an average of all grades. But as you can see in the chart at the bottom, CEREIT's call Grade A office market have substantially lower vacancy at 3.9%. Office tenants increasingly seek modern quality assets in prime and core locations in Europe's gateway cities. And the recent stats from [ Cushman ] show that while only 20% of Europe's office stock is BREEAM or equivalent certified, they attract 50% of the leases. As a reminder, post 80% of our office assets are BREEAM certified. This is a big point of difference in quite an old market. We believe that this focus on the prime and core space, coupled with the ongoing tight supply will continue to drive rental growth in prime and core locations with rents typically below replacement costs, hence, the aspirations of these tenants means that we're seeing really good rent increases on the back of the refurbishment space. In addition to the increase in rents, the municipalities are also providing bonus NLA for greening their city blocks, providing additional financial incentives and returns for us. We are confident in the returns from our rejuvenation projects for sustainable, accessible and quality office space in these major European cities. One of the enablers here is the Italian government, where 4 out of our 9 Italian assets are leased to the government and had a right to break lease at the end of 2022. For 3 of these 4 assets, the government will continue to remain with asset renewal for 6 years. However, a reduction of 15% in headline rent was an automatic part of these renewals, but in the largest asset in Rome, the tenant vacated the premise at the end of the year to consolidate various offices that it had throughout Rome. This now enables us to complete the permitting process with the local council for a full refurbishment of the asset. The estimated EUR 45 million construction project is expected to commence this year. In the meantime, preliminary strip-out works will start next month. Given the lack of modern space in Rome, we are already attracting very positive leasing momentum. The next page is, again, just some schematics, but really importantly, on that map, you can see that our property Maxima is very well located to the historic center of Rome in walking distance to the Coliseum and opposite the major hospital and shortly will be very well serviced from a new adjacent metro station. Turning to Slide 34 for our redevelopment of our Milan asset, Nervesa 21, construction works are progressing very well planned delivery on time and within budget costs at the end of this year, a binding pre-letting agreement was secured for almost half of space last December with a global media company a year ahead of our plans, vindicating our strategy. For the remaining space, there is strong leasing demand with little modern available stock in Milan, where Grade A office vacancy is only 2.6%. The project aims at the lead platinum and well gold level certifications, again, a must in this new market. 95% of the strip-out materials will also be recycled and have been recycled to date. So now turning to a very quick runaround on the economic outlook. As you can see on Slide 36, the Eurozone GDP growth in the quarter was up 2% -- 0.2% and the estimates, importantly for the Eurozone for FY '23 continue to be upgraded and supported by a strong labor market and fiscal support. Last estimates on the Eurozone have also put unemployment -- employment growth, I should say, at 0.4%, particularly in France, the unemployment rate fell to 7.2% in the fourth quarter, the lowest unemployment rate in France since the GFC. So turning to Slide 38. This chart essentially shows that the leasing volumes usually lag sentiment by 2 to 3 quarters. So the continued improvement in employment expectations will support the leasing volumes and we could see that in our stronger second half of last year leasing. Slide 39, Eurozone inflation has fallen, and we continue to see that attributed to lower energy inflation. There was still higher food prices, but the recent January flash numbers continue to show a moderation. As core inflation remains above the ECB targets, the financial markets are implying continued monetary policy tightening. It is expected, if you look at the implied curve that the ECB will finalize interest rate hike sometime this year on the back of the expectation of the falling inflation data, but also the falling gas prices and more moderate wages growth. Pleasingly, on Slide 39, as this warmer winter draws to a close, volatility in the gas prices in Europe have moderated with natural gas prices dropping below the pre-Ukrainian invasion levels. The EU governments have also provided over EUR 700 billion worth of support to household and businesses to mitigate the increased gas costs equaling the support that was provided during the COVID years. Further measures to encourage the switch to alternative energy sources are also underway. And we can see that in our own portfolio, where again, we're about to embark on a reasonably large rollout of solar panels in parts to provide green energy to our tenants. Turning to Slide 40. Investment activity for the year fell to 2014 levels, primarily due to limited supply as funding costs increased substantially, causing a very wide bid-ask spread between buyers and sellers. So we'll be reasonably patient in our staggered divestment program, while this price discovery continues. So in summary, the European economy has shown remarkable resilience despite the sort of the crisis that were looming in expectations and sentiment last year. We've delivered an excellent set of results with good DPU growth, and as Shane highlighted, would have hit close to 10% had it not been for a couple of one-offs, while maintaining gearing below 40%. For FY '23 economists have upgraded the Eurozone real GDP growth forecast and as I mentioned earlier, the energy crisis appears to be more contained and inflationary pressures are gradually falling. While market fundamentals in Logistics and Grade A office sectors in Europe are supportive, continuing rising interest rates could cause further valuation declines. So on the one hand, we've got good income growth, but with the higher interest rates, we're seeing that not coming through in valuation. So we've got this dichotomy of performance. So at current pricing, the yield of CEREIT is 10.4% and is trading at a 30% discount to NAV. The income growth will be supported by the higher occupancy, rising market rents and the indexation that's embedded in each lease that we have. Sustainable developments and asset enhancements will further improve the overall quality of the portfolio and provide growth in DPU and NAV over the medium term. Approximately EUR 400 million in nonstrategic asset divestments will be staggered over the next 2 to 3 years to fund the development program and rejuvenation program and offset any potential pressure on LTVs in the near term with this slight decline or pressure on valuations with the impact from the higher rates. So we do expect that we'll have slightly potential softer earnings in the short term before the benefits kick through in the medium term. So we're confident that our efforts to responsibly manage financial flexibility and augment the quality of CEREIT's portfolio will allow us to manage this risk amid the uncertain but improving macroeconomic environment. So with that, I'll hand over to Ciara and take any questions. Thank you.

Thank you, Simon. [Operator Instructions]. Our first question comes from Terence Lee.

Simon and Shane. For the presentation, so EUR 400 million in divestments and EUR 250 million on development. I have 2 questions. With the quantum of divestments higher, the pace of development is also being fairly long-dated and development is seemingly lower on higher construction costs. How do we convince investors that this reconstitution is a net accretive exercise for your DPU over the medium term? As you also have spoken about the few softness in the near term. Maybe I would just...

Yes. So Terence, a couple of things, thank you for the good question. So firstly, we didn't mention DPU. We only mentioned earnings. So as we've highlighted in this year's results, the board has a policy to top up distributions for the loss of the income during the development of those assets that were previously leased and will be vacant obviously, during the refurbishment and as Shane mentioned, we have over EUR 12 million of realized profits still in reserves. That's the first point. The second is just with regards to construction costs, we're actually seeing prices come down, not go up, vis-a-vis year-on-year. And secondly, rent growth is higher than where it was last year. So without giving exact guidance, the yield on costs that you refer is the same as the yield currently on the divestment program, so we'll get higher-quality assets with longer leases with less CapEx in the future and a future-proof portfolio without it being dilutive. And in fact, our expectation clearly is a trick to be accretive. Does that answer your question?

Yes. Quite clear. I have a second question. I mean, as Simon, you also mentioned a wide bid-ask spread in the market. So should we still anticipate any gains to arise on top of the EUR 400 million that is still marked for divestments going ahead?

Yes. So look, we're in various stages of negotiations. So as this call is being recorded, we're very confident now price expectations that we're currently negotiating with. So I don't really want to jeopardize on those negotiations by being too specific. What I would note is the assets that we are looking to dispose. Many of them have gone through substantial asset management and AI initiatives already. So with longer leases in place, as we just showed in this year's results, the valuers and potential buyers would reprice that lower risk that our teams have implemented during the asset management plans. So I think our track record of managing our disposal program over the last 3 years where we've delivered above valuation. While I'm not going to predict that this time around, I would point to that track record.

Our next question comes from [ Amanda Sae ]. It seems we're having problems from Amanda. We'll move along to Dale. Dale also seems to be facing some audio issues. We may have Amanda back. Apologies, it seems both are facing audio issues at the moment. [Operator Instructions] We'll now take a question from [ Mervin Song ].

Simon and Shane. Maybe I can ask a strategic question, big picture stuff. Obviously, I was trying to grapple with where interest rates settle at, obviously, work from home impact. In terms of how you want to -- how you -- what your plans to reposition your portfolio in the medium term in terms of exposure to office assets, logistics, is Poland too close to Ukraine. Yes, that's your thoughts how you want to position this portfolio over the medium term given all these uncertainties?

Yes, a really good question. And we did try and address that back on Page 8. So maybe operator or Elena, we can share the screen again. And hopefully, this also addresses Terence's question. Yes. So what we've got here, Mervin, on the left-hand side is our current portfolio. Now it's -- this diagram is to scale, so it's not a secret that the left-hand column is EUR 2.5 billion that's our current asset portfolio. And the Shane didn't want us to put the projected valuation on the right-hand side, but it is to scale. So if you get your ruler out, you would be able to measure it. So again, this is sort of the embedded development profits that we expect to provide even with higher cap rates today than a year ago. So that hopefully helps position the sort of the bigger picture that will be towards 60% Light Industrial and Logistics and around 40% of Grade A quality assets, which will be predominantly in Northern Italy and the Netherlands. So the other markets in the other office areas, as you've mentioned, you could assume we're in that 19% that are earmarked for divestments. So what COVID and work from home has done is it's really created this bifurcation of Grade A, well-located assets, where tenants are moving into, again, trying to lower their own employees back into the office and create the cultural necessities of businesses, but it has accelerated the sort of the lack of demand for older, more stranded assets that if you don't spend money on or invest in becomes harder to retain the tenants. Luckily for us, those type of assets that we have aren't highly valued within the portfolio, valued pretty much at land value already and therefore, lend themselves to alternate uses. So with the very strong housing markets due in accommodation market, a number of these assets, as I mentioned, for example, the ones that were about to sell in Warsaw are to local developers with alternative strategies. It's not just accommodation. Some of these buildings lend themselves to say, education or life sciences. So a lot of local operators in either Helsinki or in Warsaw as examples, see value in our assets that are greater than the potential value as an office purpose asset. So we'll continue to look to sell these assets to the local developers where we don't have the expertise. Does that help answer the question? So we'll have all Grade A office assets to multinational MNC tenants, but a predominance of really strong Light Industrial and Logistics assets.

This makes things a bit clear, so apologies, I doubt it's a bit late...

No, no, it's good to come back to this chart because we get a lot of questions around how does the portfolio look like? We're not a developer. We're not building these office buildings to then flip them, a, that would create issues with MAS. That's not our -- this is still a REIT. This is still a low-risk, predominantly income-producing portfolio. But part of what we've said a number of years is there's value-add opportunities. And we'd much rather capture those value-add opportunities within the REIT where we have the expertise, particularly in the office and logistics sector, then selling them into the market and then down a later stage when cost of capital improved buying them back.

Is there a time frame you when to achieve this by, I don't know where you want to be pinned down on the exact time frame.

Yes. I mean, we've said 2 to 3 years. I mean, we spent a lot of time in the presentation on the developments. I mean, we've been planning for this for some time. So the closer we get to being able to start these projects from a permitting perspective and a commercial perspective, the more we're able to talk to the market and to our investors on. And so this page here, this slide here, again, continues to give more detail as we get closer to the start. So we're now halfway through the Milan project. And we're almost kicking off the strip-out works for the Rome project. And then the third asset on this top slide here in Ruyterkade, this is around an 11,000 square meter office building located right next to the main brand new Grand Central Station of Amsterdam. And so we're working towards a 25,000 square meter quite a large floor plate property, but a lot of the large Dutch tech companies are really looking for. So we're really excited about this one. And as we get closer to planning approvals, we'll be able to reveal more. But that property will be very accretive for the REIT, very well located.

We will next move across to [ Amanda Sae ] to see if -- hopefully every issues have worked out.

Okay. All right. I'm so sorry for the issue earlier. I just have one question regarding office. Could you give us more color on the weakness in the NPI margins for your office across all geographies, but maybe especially France, Poland and Finland, is the weakness in the office market, anything to do the Ukraine war? Are you seeing a structural decline in our supplier demand in those markets?

So the French decline was because the previous year, we had a lease surrender payment. So the '21 number was higher because a tenant prepaid their rent and vacated most of the space, although came back and signed more space. Poland is an example of occupancy and the same with Finland.

Poland, sorry. I didn't catch you back there.

Yes. So what we see on Slide 46 is the decline in occupancy in Poland and Finland. As I mentioned in Poland, the 2 assets that we're looking to sell to developers who actually want vacant possession, so in part 2 of the assets, we're not in active leasing as we're close to final sales to developers that wouldn't like, as I said, empty buildings. Finland, which is more of the Suburban office stock, you're absolutely right, and I tried to address that in Mervin's comments that those particular -- that particular portfolio would fit into the Suburban ring roads of Helsinki, smaller tenant base, and that's not going to be a core part of our investment strategy and really being accelerated by COVID and the work from home and the demand for Grade A quality assets. So you'll see us dispose of both Polish and Finnish assets as part of our program.

And maybe Amanda, maybe I should also just mention Italy and Nervesa, the development. So whilst that has no impact on occupancy because it's under development. So we've excluded it from the occupancy numbers. It also has no impact on DPU in a way as well because as we've stated, we will -- we have topped up for the lost income of about EUR 2 million from Nervesa. So that does impact on the office sector NPI.

Right. Okay. So maybe just for myself to be clear. So does that mean that you would not describe any impact on your portfolio from the war in Ukraine?

No. So from an income and occupancy perspective, the tenant demand that we are seeing is really the bifurcation of Grade A versus other. We're not seeing any impact from the Ukraine. In fact, I was in Warsaw a couple of weeks ago, and there's around 2 million quite, how do I say this, educated and reasonably "affluent refugees" that are in Warsaw. So we know that, for example, retail has actually been quite resilient at the moment because of the additional wallets and shoppers that are now in Warsaw. So housing prices, rents, et cetera, are actually rising in Warsaw as a result. It's an unfortunate issue that the borders of Ukraine have substantial issues with less well off refugees, but those that can afford to move to the big cities and continue their businesses are doing so.

Right. Okay. On my last question, I just wanted to clarify for the 3 office redevelopment in your pipeline, are these assets already vacated?

2 are. So Nervesa in Milan. Amba Aradam and Maxima in Rome. And then the third asset in Amsterdam, the government tenant lease expires in 2025.

The next question we'll take is from Dale Lai.

Simon, Shane, can you hear me this time?

Hey, Dale.

Yes, finally. Okay. Just 2 quick questions for me. First one being the effective tax rate has increased to 9%. So should this be the effective tax rate that we are expecting going forward?

Yes, it's a very good question, Dale. And it's one that I think we would say that it's not representative of necessarily going forward, apart from the fact that, overall, we are seeing in a lot of jurisdictions that governments are looking to increase their tax revenue. Just for this particular year-end, we have made some accruals for higher tax expenses. And this is a conservative position that we've taken. So it isn't a higher effective tax rate, but the juries out whether that's going to be sustainable into the next year or so. It depends. There's a couple of -- there's a conservative position to say.

Okay. Okay. Got it. Got it. Okay. And oh, yes, before I forget, happy birthday in advance.

Happy birthday.

Oh, thank you.