Stoneweg Europe Stapled Trust (SET) Earnings Call Transcript

We will begin with a presentation by the Cromwell European REIT management team followed by Q&A. [Operator Instructions] Please note, we will be prioritizing those with mobile questions today. Now I will hand across to the CEO of the manager of the Cromwell European REIT, Simon Garing. Simon, over to you.

Thanks, Kara, and good afternoon to everyone today, and thank you very much for joining us as our financial year 2023 results were published on the SGXNet this morning. As a short introduction, CEREIT today remains the largest SGX-listed REIT, which owns a 100% European commercial real estate portfolio, with 110 predominantly freehold properties across 10 countries valued at EUR 2.3 billion, our investors can benefit from high yields and 2 major secular trends in Europe namely: continued growth in logistics, driven by the favorable supply demand dynamics; and a flight to quality in the office space as tenants become more discerning of their workspace environment and energy efficiency demands. As a result of our investment strategy at the end of 2019, our portfolio is now more balanced towards these trends with a 53% weighting to logistics and 45% weighting to office, totaling around 1.8 million square meters across these 10 countries. If I can move to Slide 4. 2023 was a reasonably successful year in a tough operating environment as we maintained a disciplined approach to capital management and progressed on balancing the portfolio to protect unitholders' long-term interests. We're really pleased to announce the full year distribution per unit is EUR 0.1569, and that's based on a 100% payout ratio of operating earnings. This year, we're not providing a capital top-up. So adjusting for the capital top up we made in 2022, the distribution this year is down only 4.1% on a like-for-like basis. And sequentially, the second half distribution, which will be paid at the end of March this year, is slightly higher than the first half that we paid in September last year. Full year net property income is up 4.1% on a like-for-like basis, supported by a very high 94.3% occupancy and a 5.7% rent reversion. Our redevelopment projects in Milan and the Czech Republic and Slovakia were delivered on time and on budget, completing with 50% to 70% pre-leasing levels and we expect to be fully leased by the beginning of the European summer. We're also ahead of our target for asset sales with EUR 197 million divested during last year at a 14% premium to valuation. And we remain disciplined with CEREIT's capital metrics, retaining our Fitch investment-grade credit rating. Net gearing remains within our Board policy range at 38% and we have a very high interest rate cover of 3.8x. And we finished the year with EUR 250 million of cash and undrawn credit lines. So we're in a very comfortable shape. One of the key factors that underpins the resilience of CEREIT is our size and diversified nature of our tenant base. Our top 10 tenants account for only 23% of the total headline rent, with no one tenant exceeding 5% of the total rent. This is particularly notable as 4 years ago, our top 10 tenant customers made up over 40% of the total headline rent. Bond investors, in particular, take note of this diversification, given the less reliance on any one particular tenant. The other note here with our tenants is they're either global MNCs or government agencies, again, providing very high credit ratings. No single industry sector represents more than 17% of the portfolio. CEREIT's largest exposure in any one industry type now is transportation through logistics, which is a reflection of our pivot to the sector. And we'll discuss the lease expiry profile in more detail, but for now, note the long weighted average lease to expiry of just under 5 years. Turning to Slide 6. In 2023, the portfolio occupancy remained high at 94.3% after we released or took on new leases of over 270,000 square meters or over 15% of the portfolio, including 61,000 square meters in the fourth quarter. And from an office perspective, that's over 20% of our office space was either renewed or re-leased. The 5.7% positive rent reversion was slightly above CPI and continues to reflect the low vacancies and good market rent growth in both the office and logistics markets that we generally operate in. A highlight in particular was the office portfolio is positive 9.4% rent reversion leading to a lift in occupancy to over 90%. Andreas here will explain in more detail. But generally, this should be considered a really good result given the weak economic background. And again, you will see in this presentation that the Grade A office markets that CEREIT invest in, in these gateway cities in Europe, the average vacancy is only 3.2%. These gateway cities in Europe are vastly different to other key cities in other -- on other continents. So again, a very different market, and we're getting the benefit of that through our European portfolio. Turning to the next page. A lot of the success is actually driven by our pivot 5 or 6 years ago to recognize that ESG performance certification is very important to attract office tenants into our portfolio. We're ahead of our medium-term ESG targets, such as our GRESB score and our proportion of green leases. We're now ranked in the top 3 of our peer group throughout Europe. While these metrics are important for tenants and investors, almost half of CEREIT's debt now have the sustainability-linked KPIs. So again, as we achieve these KPIs, that benefits you, the equity invested through slightly lower interest rates. And we are particularly pleased with our continued AA MSCI ESG rating, which has become the most used ESG benchmark by global investors. This is akin to a credit rating through the credit rating agents, but a lot of bond and equity investors now look at the MSCI ESG score. And we're really pleased that the Cromwell European REIT is 1 of only 3 Singapore REITs to be awarded such a high status. So with that, I'll turn over to Shane Hagan, our CFO, to go through the financial performance of the year. Thank you, Shane.

Thanks, Simon, and good afternoon. FY '23 gross revenue NPI were lower year-on-year, mostly due to asset sales and the absence of income of about EUR 3.8 million from Maxima in Italy, which is undergoing strip out works. But this was partially offset by a one-off dilapidation income received of EUR 1.3 million from the previous tenant. There was also a lower contribution from 8 Demanio assets due to a 15% reduction in overpaid rent claimed by Demanio. The larger sales were Piazza Affari, which occurred in June and Viale Europa in October. As Simon mentioned, the FY '23 NPI, net property income was 4.1% higher than the prior corresponding period on a like-for-like basis, excluding acquisitions, divestments and developments. And this was led by the logistics sector, which was up by 5.6% and even the office sector up by 4.2%. Distributable income of EUR 88.3 million and the DPU of EUR 0.1569, was 8.7% lower than the pcp, mainly due to the lower NPI I mentioned as well as, one, higher interest expense, mostly resulting from the higher 3-month Euribor and STR, where the average interest rate for FY '23 was 2.59% versus 1.84% in the prior period. There were also higher margins from the new loans drawn and higher borrowings drawn in the first half of the year to fund development and capital expenditure. There was an absence of capital top-up, so 2.5 million -- EUR 2.05 million was paid out related to Nervesa 21 in FY '22, and there was no such payment in this year. These amounts were partially offset by additional income from annual inflation indexation across the portfolio. And we had a one-off tax credit due to a reversal of a Dutch tax accrual of EUR 2.3 million that was no longer required. So as Simon mentioned, like-for-like DPU, only 4% lower than the prior period, excluding the impact of Nervesa and Maxima. So to explain this graphically, the waterfall charts, these are quite useful to explain the key result drivers. As we mentioned last year, we paid a capital top-up, capital gain top-up to offset the absence of income from the Nervesa development. So the relevant DPU number for last year is EUR 0.1686. As I mentioned, 2 key drivers: the negative impact of divestments, about [ EUR 0.65 ]; and the absence of income from Maxima in Italy, about [ EUR 0.68 ]. Higher interest rates and borrowing margins have had a negative impact of EUR 0.015 on the DPU as interest costs were 32% higher year-on-year. Interestingly, providing a significant offset to the higher finance costs was an increase in like-for-like NPI, which provided almost EUR 0.01 benefit to DPU and that's driven by the higher indexation rent reversion and leasing up of space. The current tax expense was EUR 3 million lower primarily to the benefit of the -- due to the benefit of the EUR 2.3 million reversal from the prior period. Now turning to the sequential half year comparison. It's pleasing to note that the second half DPU was actually higher than the first half, and this was partly due to 2 one-off items being the tax expense reversal and the dilapidation income received from Maxima. Note that the portfolio NPI was only marginally up as the indexation is a little bit seasonal and the higher expectation, a higher indexation is expected in the earlier part of the year. Two negative items impacting the sequential comparison were the impact of the divestments and also the one-off Demanio rent reduction. And it's pleasing to note that interest costs were flat sequentially based on our hedging strategy. So this slide here shows the 5-year -- or the 6-year DPU. You can see CEREIT has recorded relatively stable distributions as the like-for-like numbers in the blue boxes show. Again, we would like to note that this is a fairly positive outcome in light of COVID, interest rates rising, valuation declines and high inflation in the past few years. Most of the decline in the current is the headline DPU -- is the effect of higher interest rates on the current headline DPU. Turning now to the distribution timetable. Pleasing to note that the second half distribution will be 83% tax exempt. We've decided to leave the distribution reinvestment plan turned off given the discount that exists between the unit price and the net asset value. And importantly, the distribution payment date will be the 28th of March. Now turning to the balance sheet. The balance sheet has really remained resilient with cash growing to EUR 74 million, and 0 drawn against the EUR 200 million committed revolving credit facility. Also, there are no debt expiries until the end of next year. Asset sales of almost EUR 200 million have provided funding for developments and CapEx while also reducing the net debt by 12%. NAV was lower due to the fair value loss on investment properties, which I will cover on the next slide. And note that net equity includes EUR 31.1 million of realized capital gains, which includes a EUR 3.1 million profit that we made on the EUR 50 million bond buyback that was completed in December. Now turning to valuations. The headwinds of high interest rates has affected asset valuations across the whole REIT market. However, due to some early strategic rebalancing of CEREIT's portfolio, which we actually embarked on a couple of years ago, we were able to partially mitigate this headwind with only a moderate 1.5% portfolio valuation decline in the past 6 months and 3.5% decline over the last 18 months despite a more than 100% basis point -- 100 basis point yield expansion over the period. And note, this is before taking into account capital and development expenditure. Grouped by asset type, logistics performed well, recording an almost 5% valuation increase over the last 18 months. Really validating our strategy to rebalance our portfolio towards the sector. And this was driven by higher passing rents and inflation indexation. Office performed less well over this period, with an 11.6% valuation decline, basically due to widening of the terminal cap rates and a more negative view of secondary office locations in particular, Poland and Finland. Meanwhile, our other asset category, all in Italy recorded a 8.7% valuation decline due to the widening of terminal cap rates partially offset by the increase in rent. While CEREIT's headline aggregate leverage is just a tick over 40% at the end of the year, the net gearing fell to 38.4% due to debt being repaid. The current leverage is well inside the loan covenants and MAS limits of 50%. Given the higher interest rates at the end of the year, plus the margins on the new loans entered into, the all-in interest rate at the end of the year was 3.19%. We continue to remain very focused on our liquidity and will defer speculative developments and nonessential CapEx if we need to. We remain committed to maintaining CEREIT's investment-grade credit rating of at least BBB minus with stable outlook. 2023 has been a busy year for us in capital management, focusing on our liquidity and extension of debt facilities. During the year, we have completed almost EUR 500 million of treasury transactions with good support from existing and new lenders. We were pleased with the outcome of the EUR 50 million bond buyback in December, and we will continue to focus on this liability management initiatives during this year. CEREIT now has no debt maturing until November 2025, which we will look to manage by the end of this year. With recent hedging, we're now 88% hedged until the end of 2025 and over 40% for the year after that. And this should coincide with opportunities to hedge at lower rates at that time. And with that, I'll now pass to Andreas to talk about portfolio and asset management.

Thanks, Shane. I want to come back to CEREIT's operational performance and specifically, the performance of CEREIT's Light Industrial/Logistics portfolio. Consistent with the broader market occupancy in our Light Industrial/Logistics portfolio is slightly down to 95.6% despite a 159,400 square meters of leasing done during 2023. The occupancy drop in Czech Republic and Slovakia are due to the additional partly vacant area from completed developments, which are expected to be leased in the first half of 2024. The Danish occupancy rate dropped by 4 percentage points, mainly due to a rental guarantee coming to an end in [ Sonova ] and 2 leases expiring in [ Hargaden ], which we expect to release in the next 6 months. Light Industrial/Logistics sectors, rent reversion was 3.7% for the full year. For the second half of the year, rent reversion for the sector was only 2.3%, and as 2 key German tenants exercised their 5-year auction at the same brand. Otherwise, the rent reversion would have been higher. These renewals for bigger units of 10,000 square meter plus had minimal rent reversions in Germany and Czech Republic, where new leases in units smaller than 1,000 square meter attracted higher double-digit rent reversion at France, Germany. Sector WALE remained unchanged at 5.1 years versus the prior quarter. Average vacancy for the electricity sector and our European investment countries saw slightly in the second half of the year to 2.9% with tick-up moderating during the same period. Although the current vacancy rate notched slightly, it remains far below the average rate seen prior to the pandemic. With new supply pipeline peaking midyear and occupier demand expected to return, this is likely to put downward pressure on the vacancy rates. Rental growth in the sector has slowed in the last few quarters from the peak of around 12% in the second quarter 2022, but remains positive. Turning now to the office portfolio. It's pleasing to note the overall occupancy in office has increased 120 basis points over the fourth quarter to finish the year at 90.3%. Our premium-rated French office asset [indiscernible] has attracted good leasing momentum with a 10-year lease being signed by [ Cyber ] for 1,600 square meter, taking asset occupancy up to 95.3%. In the Netherlands, we are in advanced discussions with our largest tenant, Notional Netherlands, at Haagse Poort and then Hague, for a long-term lease renewal from 2025 onwards, which will also see an exciting partnership with them for a major energy efficiency, asset enhancement projects. Occupancy first slightly in Italy and Finland, explained by peripheral allocation and building age attracting less demand. The increase in occupancy in Poland is to removing the wagon asset Grójecka 5 from the occupancy starts since it has been emptied as a condition for a sale to developer. We are also close toward exclusivity to buyer for another partly vacant Polish office asset, which would positively impact CEREIT occupancy rate once the asset is sold. Leasing activity in CEREIT's office sector in 2023 totaled 107,600 square meters. New leases and renewals in the second half of 2023 were signed at a positive 9.4% rent reversion rate. This was driven primarily by demand from our grade A offices in the Netherlands. Then a customer retention rate for offices was at 62.5% in 2023. WALE improved slightly to 4.1 years by the year-end, up from 4.0 years in previous quarter. Market data for the office sector in CEREIT's key cities show that takeup slightly improved in the second half, but vacancy rates still went to 9.3% due to the impact of occupiers, recalibrating their requirements to take lesser but higher quality space. We see that polarization between prime and secondary is accelerating, resulting higher levels of pre-commitments to new developments and renter growth for prime locations. The bottom left-hand chart shows that Grade A office vacancy in our key [ capacities ] is at low 3.2%, supporting our rent growth and tenant retention negotiations. Vacancy in Finland and Poland rose to further 14.9% as oversupply meets reduced demand, in particular in secondary cities and non-central locations. A good example for the performance premium of better-quality space is to set our prime office market. The prime rents have increased from EUR 350 per square meter to EUR 600 per square meter as of now with an accelerated growth in the last 3 years. Our [indiscernible] asset in Amsterdam's 300-meter walking distance from Amsterdam's main train station and earmarked for redevelopment, which would unlock the significant rent increase potential. Please take note of credit vacancies of between 1% and 3% only in Milan, Rome in the Hague, we have centrally located office assets earmarked for [indiscernible] and redevelopments. Amenities such as rooftop, terraces, gyms, restaurants or preface, have a growing importance in office assets to attract and retain talent. According to recent studies conducted by Siberian Light Frank. As a proof of concept, 2 rooftop terraces are a feature of our Nervesa 21 office redevelopment and have been one of the reasons why Universal Music signed up for Nervesa 21. In 2023 and up to early 2024, we completed 3 development projects worth a total of around EUR 50 million on time and large on budget. Our Nervesa 21 project in Milan, Italy was completed in January 2024. 7% of the space is leased and has been handed over to 3 leading firms with Universal Music Group being the anchor tenant. With efficient floodgates and premium sub amenities, as I mentioned, we expect the finished floors to lease up well and ahead of our original brands. In Lovosice Czech Republic, we completed a EUR 15 million project, comprising refurbishment of 2,600 square not existing building and developed 5 new warehouses with total area of 14,677 square meter. This asset is now 7% led with advanced discussions on the way for the rest of the space. In Nove Mesto, Slovakia, we completed development of 2 new warehouses to enrolled 16,000 square meters with a total project value of EUR 30 million. The first warehouse has been fully pre-let with the other around 50% pre-let. Looking forward, we have more than EUR 200 million of development pipeline opportunity, which are expected to be accretive on their completion. We are mindful to stage the development program to manage the overall risk and will keep the Quantum of development value well below the regulatory limit of 10% of deposited property. This slide shows the likely order of these projects, while noting that the substantial part [indiscernible] is still a few years away from changing the master plan and receiving all the required approvals. In the meantime, we are showing very strong income returns of this asset. Now I'm handing back to Simon to talk you through market commentary and management outlook.

Thanks, Andreas. So as you can see on this chart, inflation has fallen markedly throughout 2023. Oxford Economics is forecasting average euro zone inflation down to around 2% in 2024 and in line with ECB targets in the medium term. The Cromwell house view is for slightly higher inflation and a slight delay in the ECB will move to cut rates. Nevertheless, sometime around the summer, European summer this year. So we do continue to plan to remain conservative in our approach during the first half of 2024 before we expect the sort of that stabilization and switch to the uptick in the real estate cycle in the second half. The ECB refinancing rates have believed to have peaked at around 4.5%, leading indicators point to soft business and consumer demand in the short term, which support the inverted yield curve on the next page with the German 10-year bonds now trading at a low 2.4%. So 200 basis points lower than U.S. treasuries and over 200 basis points lower than the ECB rates. This is a net positive for real estate over the coming years. The right-hand chart shows GDP growth is also at cyclical lows. The GDP is projected to grow by a nominal 0.6% this year, slightly above of the 0.5% last year, although the performance of individual countries varies widely. And you can see that again in our valuation results, with markets such as Denmark being up over the last 18 months in anticipation of that stronger economic growth. So when we look at CBRE's recent total return forecast from a real estate perspective, which was published a couple of weeks ago, CBRE are now forecasting close to a 10% annualized total return for both office and logistic assets in Europe over the next 5 years. Indeed, these represent the strongest forecast returns for a decade as we come out of the cyclical lows and having just come out of that massive rise in cap rates that is largely now behind us. The bulk of the returns from real estate still expected to come from maintaining the relatively high income yields, some rental growth and capital gains as the cap rates converge in response to the expected lower rates over the next few years. For office sector, CBRE forecasts the Netherlands to have a total return expectation of just over 11%, the strongest in their forecast range. That's very relevant for CEREIT because Netherlands is our largest office portfolio. For logistics, annualized total return for key markets, which CEREIT has logistics presence in, is expected to average just under 10%, and over the next 5 years, with France expected to post the strongest growth. Again, CEREIT's largest logistics portfolio is in Paris, so should benefit from that expected recovery. So look, in conclusion, we think this is a very pleasing set of results, underpinned by some very positive market fundamentals in both office and logistics where you see in grade A office gateway city vacancies to be 3.2% and across logistics, 2.9%. So very much the underlying fundamentals of the portfolio and the markets we operate generally are in very good condition. This should provide confidence to investors to help close the wide pricing gap to our NAV of EUR 2.12 and the high 10% plus dividend yield that CEREIT currently offers. Managing for the tail end of this higher interest rate environment still remains a key priority for us. We anticipate fundamentals to be supportive for net property income growth although there may still be DPU headwinds from the transition back to the normal borrowing costs as well as from the asset sale program that we're undertaking. Though as Shane mentioned, we're at 88% hedging, so one of the higher hedge of the REITs in the sector. So the 3 key priority areas ahead of us are, firstly, our local Cromwell asset management teams that are on the ground continue their excellent asset management programs. We are working diligently to keeping the portfolio occupancy high, while fully capturing the rent reversion opportunities and inflation indexation, but almost all of our leases in Europe have. We are progressing with the various green initiatives to enhance the sustainability qualities of our assets. That's good for our tenants. It's also good for our investors. We continue to invest judiciously in redevelopments and AEIs to further future proof the portfolio. Our second priority remains to continue our asset recycling program, executing further EUR 200 million of divestments is still a priority, notwithstanding the comments that we made to getting close to the bottom. This frees up capital to fund our asset programs and our refinancing programs without having to raise expensive equity and also maintaining that high payout ratio, which is again different to many other REITs. And that enables us to reduce our weighting to smaller and less liquid markets and improve the quality of the portfolio. And thirdly, we'll continue our disciplined capital management approach. While we believe that most of the interest rate increases are behind us, we remain vigilant to the headwinds and continue to identify opportunities to offset the related financial and valuation risks brought about by the tighter credit conditions and softening Eurozone economy. So overall, we are cautiously optimistic that the cycle will turn in 2024, and that CEREIT, Cromwell European REIT is well placed to capture the opportunities ahead of us. So thank you all for your investment and support. And Kara, we can now open the call for Q&A. Thank you.

[Operator Instructions] So our first question comes from Rajiv and he submitted this via the text questions. So could you please elaborate on the nature of the reduced tax expenses, which resulted in a multimillion dollar benefit and any such possibility in the future?

Rajiv, I'll answer the first part of the question and then hand over to Shane for the comments around the future. But it's really important for investors to understand that our distribution per unit of EUR 0.1569 and is after we pay in Europe, the withholding tax and the income taxes that we're required to. So again, unlike other markets, other countries, investors in the REIT do not have to fill out any forms. And we've already paid the relevant taxes in Europe, and that's already taken into account when you look at our even very high distribution yield of EUR 0.1569. Shane, on the future?

Yes, maybe just a point -- thanks, Rajiv for the question. So just to inform you about this. Last year, we did make an accrual of EUR 2.3 million and it was a conservative approach. We weren't sure what the outcome was going to be. But we were pleased that the -- we did receive the confirmation from the Netherlands tax authority, which enabled us to reverse the accrual. So it was really just a conservative approach taken in FY '22. So whether there will be more of these in the future. I would say this is probably a larger amount, as you say, multimillion, unlikely that there will be other significant provisions made that would -- could end up in a reversal of an accrual data. However, there will be smaller items now and then possibly some in Singapore from positive tax rules to come this year as well.

In Poland, I think there's also some positive tax rulings to come as well.

Yes.

But the point is we pay taxes in Europe we make provisions, obviously, on the delayed approach, and we take very good tax advice from the likes of PwC as well as our own in-house tax councils. Thank you.

Thanks. We do have a follow-up question from Rajiv. What is the projected fall in interest rates at the end of this passing year, say, December 2024, please?

Yes. So right now, as I mentioned, we don't have any debt expiring this year. And if we look at the outlook for the short-term interest rates where we do have an exposure. We are actually expecting lower rates this year. However, should we decide to refinance the bond, which expires in November 2025. Then based on today's rates, there would be an increase. The maths are quite easy. So basically, the bond represents almost half of our total debt. The current cost we have for that is around 2%, where we see on the screen today for repricing that debt would be somewhere around 5%. So we would see an increase in our all-in interest costs increasing by about 1%.

We do have one final question from Rajiv. Can you please update the projected redevelopment of the Paris asset and any codeveloper talks going on, please?

Yes, as we said, parties for as a long-term redevelopment plan. We have made good progress in the discussion with the public stakeholders on the change of the master plan, which would then allow for a mixed-use scheme. There's a significant increase in the net letting space. And with the majority of logistics land industrial on the site. We have had preliminary discussions with interested party that would like to work with us. However, from our perspective, it's too early to run into potential JV discussions. So we would like to create most of the value at ourselves by making more progress on the master plan and potentially then apply for the building permits.

Thank you. That also answer the questions [indiscernible]. Next up, we have a question from Tan, do you see rate have any assets in the EU/NATO and Ukraine -- sorry, the Ukraine, U.K. war theater. And is it affected by the spillover, for example, refugees moving into Poland?

So we have approximately 10% exposure to Poland and Finland and a couple of percent with Slovakia as well. So from a broader perspective, there is obviously an exposure from a border perspective. But in terms of the economic impact, if you have to look at our data pack, you'll see that GDP forecast for Poland is actually higher than most of Western Europe for the next couple of years. Indeed, if you go to places like Warsaw, the refugees so-called in Warsaw actually have their own financial means. And so we've actually seen higher inflation in Poland than we have in the rest of Europe as a result of more people coming into the economy. We've also seen in Grade A office in Warsaw, a slight tick down in office vacancy, again, as more Ukrainian businesses relocate into Warsaw. So from that perspective, we're actually quite bullish on the overall market environment, notwithstanding the dread of war. However, we still remain net sellers of our office assets in Poland in part because they're not all grade A in well-located regions. They're still very high-yielding assets. But from a long-term future proofing, we consider other opportunities in the rest of Europe rather than being specifically in Helsinki and then some of the second-tier office markets in Poland. So long answer to the question, still okay, reasonable growth. But our office mix within Helsinki and the second-tier Polish assets, probably not where we want to be over the next 3 to 5 years. So you will see us continuing to sell down there.

Thank you. Our next question comes from Foton. What would be the impact on property valuations in 2024 from interest rates up? Said differently, what would cap rates impress quickly, considering the low transaction volumes in the market?

Yes. So I think that's why our preprepared remarks were sort of a 2 half story. So the first half is still dealing with I guess, the past legacy of the lower liquidity, higher interest rates. Certainly, our own portfolio has seen 100 basis points in cap rate increases over the last 18 months. Having said that, our valuations held up remarkably well. So it's not just about cap rates. Our logistics portfolio is up 4.8%. Our logistics portfolio was up 4.8%. Cap rates went up, but we also had much higher rent growth and higher occupancy and longer leases. So that inflation benefit on the income side and the tailwind of tenants looking for space. I mean with the average vacancy at 2.9%, we've re-leased so much of our portfolio that, that reduces the risk profile provides the higher rent growth, which offsets the cap rates. So cap rates is just 1 part of the story. In terms of the direction of cap rates, the second half of the year could actually benefit from lower interest rates from the ECB, better lending margins from the banks. And as you may have seen the recent Savills research that shows there's EUR 900 billion of private equity real estate capital looking to deploy into European commercial assets. So we think we're getting pretty close to the bottom. Certainly, the second half, we are pretty more confident than the first half. But certainly, this should be the year of getting close to that stabilization. Now equity markets preempt that. And so again, our recent rally in the CEREIT price, albeit off very low depressed levels is in part the investors looking forward and saying, yes, we're pretty close to the bottom. Now we can start to see good daylight at the end of the tunnel. And so from our perspective, that's why we're cautiously optimistic. Still looking to sell some assets to provide liquidity and avoid having to do some of those measures that other REITs in other markets have had to undertake. So our gearing is at 38%, interest cover is high, no major debt refinanced for the next 18 months. So we're in really good shape to take advantage of what is still in Europe, positive fundamentals from an income perspective. Thank you, Kara.

And just following on from that, we have a question from Michael. Do you think valuations will continue to see decline in FY 2024? And do you think that the cap rate will continue to increase in FY 2024, please?

Yes. I think I just answered that one. I don't know, Andreas, if you wanted to add anything? Well, on valuations. Okay. Good.

Next up, we have a question from Nathan, to what percentage completion stage would you say the execution of capital recycling or transition to lighter logistics divestment of noncore Grade A office assets?

Yes. Thanks, Nathan. When we started this a few years ago, remember, we said we wanted to pivot to the majority weighting to logistics. We were 32% weighted at the time. We're now at 53%. We've got a soft target to get to at least 60%. So a material shift in the portfolio. And that's come through acquisitions of logistics, but also through the disposal of office and other noncore assets. So now we're about EUR 240 million of the way through our previously stated, EUR 400 million sales program. So I would say we're more than halfway through that, and we would expect to get through the large part of our sales program over the next 12 to 18 months. There is a balance between selling everything upfront because as you saw from Shane, deleveraging does have a negative impact on DPU in the short term. So again, we're very mindful about not selling everything. And then the second aspect to that is we're not a forced seller. There's no bank that's taking control. Our independent directors are fully in control of the REIT. And so we don't have to sell at any price. So we're very selective. If someone tries to bottom feed, we can likely tell them, no, thank you very much. So again, you look at our track record of disposing of EUR 240 million of assets at a 14% premium to valuation Again, we want to be ahead of the curve. We want to be selling assets when we're in control and not when the banks are in control, that many of our peers have fallen into that. So we are 2, 3 steps away from that. You would have seen very high levels of cash and liquidity and from a MAS and loan covenant perspective, we're probably EUR 0.5 billion, 20% plus of further valuation declines that would be needed to even get us anywhere near that realm of conversation. So again, very conservative management, very disciplined management ahead of the curve in our asset sale program, not having to sell everything, not having to accept any bid that comes through. So again, trying to give investors the confidence given that we've been trading at this big discount to NAV like many of our peers, to differentiate that, one, the underlying property fundamentals are different where we participate. And two, our balance sheet is in a much stronger position than those peers. Thanks, Kara.

Next up, we have a question from at [indiscernible]. Can you please -- apologies, can you please give us a sense of vastly the tenant incentives and secondly, the rent-free periods for our offices and LI/LL assets and how have they moved since pre-COVID?

I'll let Andreas take that one.

Yes, you have seen especially during COVID, there has been a large increase in demand and high takeover in the logistic live industrial space driven by supply constraints. And that has not only an impact on market rents, which have grown quite significantly. Just to give you an example, in Prague or in Czech Republic from EUR 5 to EUR 8. But obviously, it also had an impact on tenant incentives. So tenant incentives have come down close to 0 and we can -- we have had evidence, for instance, our [ Park to Doc ] asset, where brands have also now increase to EUR 117 coming from EUR 90 at the point of time when we bought the assets. And we get close to 0 tenant incentives. If we lease out the space, usually the tenant also takes the space as is. You don't have to invest into a reinstatement or regular refurbishment. Most of the investments that are cut down by the tenant. So that's a quite good situation. Obviously, there are also less allocated assets in the legislature sector here, you may have to give incentives. However, this is by exception perspective to our portfolio because the majority of assets have relocated. Now office is a different picture. As we have pointed out, there is a polarization or bifurcation between a really good relocated Grade A ESG credited office space, where market rent growth has increased significantly. We have shown 1 slide here, down southern market coming from EUR 300 per square meter going to EUR 600 or EUR 450 to EUR 600. Again, you would give a very low incentive for this type of assets. Whereas in the other part, the decentralized out of town business parts, non-certified and aged office assets, incentives have increased. Just to give you an example that could easily be in the area of 20%, 25% of incentives to be given for a 3- or 5-year lease renewal. And this, in particular, applies also to our Polish office assets where this still has been market -- we have seen that sales come a little bit down in the Polish market. The vacancy rates have come down slowly. Simon mentioned, the macroeconomic drivers and the special effects or in part of reallocation from Ukranian tenants in towards the office. So you see this is a quite polarized picture.