GPT GROUP - Interim / Quarterly Report 2011

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Good morning.
Thank you for joining us today, and welcome to GPT’s 2011 interim result presentation.

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Today I will provide a brief summary of our strategy
Michael O’Brien will talk about our Financial Results and Capital Management, and I will take you through the performance of our business.
There will be plenty of time for questions at the end of the presentation.

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I am pleased to report strong results for the first six months of 2011.
Importantly, we are delivering on our promises.
Operating profit for the first half was $221.5 million, an 8% increase on last year, while statutory profit was up 67%.
We are making good progress on our three financial goals of EPS, Total Return and TSR:
I’m very pleased to report EPS growth of 8% and DPS growth of 12%.
Total Return, reflecting growth in NTA and distributions, was 7.4% annualised and we continue to work towards our target of 9% for the full year.
TSR, measuring returns to securityholders, was 10.6%.

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Our balance sheet is rock solid and we continue to work hard on capital initiatives.
Our forecast average cost of debt has been reduced by a further 20 basis points, and earlier in the year we activated a share buyback. The funds to complete the buy-back came from the settlement of Ayers Rock Resort and US Seniors, and the sell down of the wholesale funds.
During the period, we also successfully launched the $300m expansion of Highpoint in Melbourne.
The team has delivered an impressive list of achievements.

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As we continue on our strategic journey towards best performance, our focus over the last six months has been on optimising the business.
We have implemented a series of short term initiatives to push up recurring income levels.
The result for the six months was helped by:
Strong performance across the business
Reduced debt costs, and the
Sell down of the wholesale funds.
Other initiatives underway include:
Efficiency gains
Selling non-income producing assets, and
The impact of buying back securities.
Initiatives like these will re-establish a higher level of base earnings that will provide a stable platform for growth in future years.

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In addition to short term initiatives, we have also concentrated on establishing building blocks for the future.
One of these is our disciplined approach to capital allocation. An example of this is buying back our securities at low prices.
Another example that I can announce today is a decision to divest GPT’s 50% share of the MLC Centre in Sydney. The capital we receive through this sale will be deployed into other opportunities.
Our organisational structure is another important building block, with the business now aligned around our core competencies of Investment Management, Asset Management, Funds Management and Development. In making the organisational changes over the last two years, six of my nine leadership team members are new to their roles. That means 2/3 of the original team has changed.
Other building blocks include process improvements and the introduction of our exciting new Head Office work environment.

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These initiatives are all part of our simple and straightforward strategy, one that we aim to execute with excellence, discipline and imagination
We are committed to owning and actively managing high quality Australian real estate assets
For investors, that means superior returns
For our customers, great experiences
Our goal is to provide total returns greater than 9% driven by minimum average EPS growth of CPI + 1%.
I believe this model, of high quality, lowly geared assets will deliver sustainable returns and positions GPT to be Australia’s best performing property company.

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To demonstrate the sustainability of our model, this slide breaks down earnings into financial components and shows the levers that can be used to enhance our core property income.
This example shows that if we are able to achieve income growth from our assets of 3% and keep our expenses at only 2%, we can produce EPS growth of greater than 4%.
With the addition of new revenue sources, growth in funds under management, accretive developments and further interest savings, this result can be even stronger.

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On the capital side of the equation:
with a distribution yield of 5%,
net assets growing at 3%, and
the benefit of retaining some earnings each year,
a minimum of 9% Total Return is achievable.
We’ll continue to influence capital growth by:
Focusing on quality
Enhancing our assets, and
Continuing our obsession with return on capital when applying our portfolio management approach.
I’ll now hand over to Michael.

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I’ll just talk firstly about the operating performance of the Group for the half year.
Realised Operating Income, which reflects our underlying operational earnings, was up 8% over the previous corresponding period – a strong result with solid contributions from all of the operating divisions.
The statutory profit, which includes valuation movements across the assets and our hedge book, was also up strongly against the first half last year, the result of a net positive valuation increase across the portfolios of $54m offset by a negative movement across our interest rate hedges of $33m as market interest rates came down over the half.
Earnings per security was up 8%, with distribution per security up a very strong 12%.

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The Balance Sheet is in great shape with gearing at 21% following:
the completion of the US Seniors Housing sale,
the receipt of the first tranche of the Ayers Rock Resort proceeds and
the progression of the wholesale fund sell down.
Look through gearing reduced substantially to 22.6% - from almost 30% in December – as a result of the sale of the US Seniors Housing portfolio.
Interest cover has improved again – to a very healthy 4 times, and NTA was up 1% to $3.64.

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In terms of the composition of the operating result:
Comparable income was up solidly across the core portfolios, particularly in Retail, driven by strong growth at Rouse Hill Town Centre and Penrith Plaza.
Office was also up solidly with strong growth, in particular, at the MLC Centre.
Income was down marginally from the Funds Management business due to the further sell down of our stakes in the 2 funds but comparable distributions were up 7.5% as a result of strong income growth across both funds as well as lower interest costs.
Income from the Non-Core assets was up despite the completion of the sales of both the US Seniors portfolio as well as Ayers Rock Resort during the half. Interest expense was up but capitalised interest was substantially lower as a result of the completion of Charlestown Square. And we’re benefitting, again, from a lower average cost of debt.

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Management Expenses, on a comparable basis, were up 2.7% and, pleasingly, below the comparable income growth achieved across the business.
We’re focussed on this because retaining this gap results in a positive leverage effect on earnings.
This year we’re looking at re-designing two of our key processes – the way we undertake our forecasting across the business and the way we procure goods and services. The benefits of making both of those processes more efficient will flow through next year.

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Reducing our average cost of debt has been a key objective for us for a while now because a high cost of debt is a drag on earnings and has contributed to the gap between the share price and NTA.
The asset sale proceeds received in the first half have enabled us to cancel our most expensive bank loans, terminate some higher rate hedges and, with bank demand to lend to us being robust, we were able to renegotiate down the margins on $525m of existing loans.
Consequently, we’re forecasting an average cost of debt for 2011 of 6.7%, a further 20 bps reduction against our full year forecast provided earlier this year and 70 bps lower than last year.

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We’ve done a lot of work over the last 2 years on extending and flattening our debt maturity profile so that the refinancing risk is low and the undrawn lines carried can be reduced which has reduced cost.
I’m delighted to be able to say today that the remaining $485m of the bank syndicated facility which matures in October next year has now been refinanced through new bank loans totalling $525m on margins consistent with our syndicated facility – that is 135bps.
The loans have an average term of 3.6 years, maturing in 2014,15 and 16, further smoothing and flattening the debt maturity profile.
The average loan term across the book – as of today – is now 5.1 years, and, as a consequence, we have no further liquidity requirements until 2013.

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In February of this year we made the necessary changes to our Constitution to enable us to undertake a buy back, and in May we announced our intention to buy back up to 5% of issued capital, which we’re funding through the asset sales we’ve completed this half.
The assets sold – the US Seniors portfolio, Ayers Rock Resort and the further sell down of our stakes in our wholesale funds – were, in total, completed at a 14% premium to book value whilst the $48 million of stock acquired to date was purchased at an average 18% discount to NTA, providing an uplift of $10m or just over 0.5c to the NTA.
The graph on this slide shows our price performance against the sector since February when we made the change to our Constitution to enable us to undertake a buy back.
The market volatility in recent weeks presented a great opportunity to acquire stock and so we moved quickly to inform the market of the key aspects of our result, enabling us to take advantage of the market volatility.
When we compare the buy back to alternative uses of capital – its clearly a compelling proposition - and we’ll continue to purchase stock opportunistically and accretively – to both operating earnings and NTA.

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Thanks Michael.
Across the portfolio we achieved comparable income growth of 3.6%.
This slide sets out the key measures for each of our three portfolios.
Each portfolio is in a strong position and has performed well in the first half.

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Notwithstanding a cautious retail environment, our retail portfolio has performed well.
Income growth of 4.1% was stronger than last year, and specialty sales were broadly the same at around $9,000 per square metre.
Occupancy costs actually reduced since December 2010 but were influenced by the exclusion of Highpoint which is now under development.
We have virtually no vacancies, and arrears remain very low.
Income is supported by the fact that 88% of specialty stores are subject to structured rental increases of around 4.5%.

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Retail sales over the past six months were variable, as you can see in this chart. Between January and June, specialty sales growth averaged 2.7% compared to the same period last year.
We live in uncertain times though, and although our first half specialty numbers look encouraging, we remain cautious about the second half, with forecast average sales growth for 2011 of 2-3%.
Both customer traffic and average spend per customer has shown minor growth over the first half.
With virtually no vacancies, we are well positioned in the face of a slow sales environment.

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We work closely with our retailers and we understand their challenges.
Between the RED Group and Colorado, there will be a total of 20 store closures. We have already leased 13 of those, and with all Borders stores now re-leased, we are using the opportunity in some cases to change the retail mix.
Rental spreads across the specialty portfolio are positive at 4.6% in the first half.

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To summarise the current retail environment, we are seeing:
Consumer confidence at 89.6, the lowest since May 2009; and
The household savings rate at 11.5%, against a 10 year average of 3.5%.
Uncertainty continues in relation to the global economy, domestic interest rates and cost of living pressures,
and online retailing continues to threaten those that cannot adapt.
GPT is well placed to respond to these challenges:
Over a quarter of our retail sales are from food and supermarkets, providing a stable base.
We will continue to leverage the quality of the assets to engage the communities we connect with.
Our centres need to be convenient and have unlimited reasons to be a destination for our shoppers.
We continue to invest time into research around the opportunities and threats posed by online retailing.
We are also actively using new technology to enhance the ways we attract and engage customers.

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The Office portfolio is also in good shape with strong comparable income growth of 3.4%.
Cap rates have firmed slightly with 48% of the portfolio valued externally during the six months to June.
In this period we achieved a large increase in occupancy compared to the same period last year, reflecting the hard work of the team.
The portfolio WALE is at 4.9 years and the number of leases being signed continues to increase.

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We have an office portfolio that has the highest proportion of premium grade properties in the sector, at 56%.
Recent asset sales confirm more tightening in cap rates will occur over the next year.
Occupancy across the GPT portfolio increased to 97.5%, well ahead of the industry average of 92%, and we continue to work with our office customers on a range of initiatives to further improve retention.

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The outlook for Office is strong.
Constrained supply in all markets continues to drive positive net absorption.
Prime vacancies are generally reducing, and effective rents are tracking upwards.
Importantly, incentives are also forecast to move in the right direction, with average incentives for prime assets in Sydney predicted to drop from around 25% this year to around 22% in 2012 and in Melbourne, from around 18% to 15%.
Across the GPT portfolio, 90% of leases are subject to fixed rental increases averaging 3.8%. With only 6% lease expiry for the balance of 2011 and 9% for next year, this provides a solid platform for continued growth.

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Our Industrial portfolio has also maintained a long WALE and has increased occupancy from 97% to 98.8%.
Income growth of 2.8% is stronger than the first half of last year.
The business is solid with good returns and low volatility, providing a strong platform for expansion in the future.
Our intention is to more aggressively grow the Industrial portfolio where opportunities arise.

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In Industrial, supply remains limited in historical terms, underpinning rental growth of 2-3%.
Only 4.4% of the portfolio is impacted by lease renewals before 2012, with almost 90% of the total portfolio subject to structured increases of 3.3%.

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One of the many benefits of having wholesale funds is our ability to turbo-charge the normal level of returns available from an asset.
In the case of Highpoint, we are able to receive a base yield of 7.6% and when a property management fee and a funds management fee are added, the ongoing yield to GPT from the development will be over 10%.
This is a great outcome.

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Both of the wholesale funds have very low gearing of around 1011%, providing significant capacity to grow.
One year returns are strong, reflecting the high quality of the portfolios.
There is a significant level of activity within the funds management business, with developments at 111 Eagle St, 161 Castlereagh, Highpoint and the proposed expansion of Wollongong.
Only $500m of our $1.5bn debt capacity in the funds will be used in completing these projects.
GPT has achieved a sell-down of GWSCF to 20% and in GWOF we have revised our target from 20% to 23% which will allow an appropriate buffer. We are currently at 26% in GWOF, leaving $90m to sell to achieve the 23% target.
From the sell-down to date, we have raised $428 million of funds. One third of this amount is from new investors to the fund.
Virtually all of these new investors are domestic super funds.

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As a result of the sell-down exercise, we have achieved a 60 basis point increase in total income returns to GPT since June 2010.
This slide sets out the components that drive the increase.
The impact of the sell-down, and reducing debt with the proceeds, will be accretive to GPT’s operating earnings by around $4 million on a full year basis.

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Development activity for GPT is currently our most effective way of growing the portfolio.
Around 36% of our total assets were created by development rather than through acquisition.
Using historical development margins in excess of 15%, every $1 billion we spend adds material value to GPT.

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Our immediate challenge is to increase our pipeline of work, and to ensure we can execute in a low risk way to ensure recurring profits and strong IRRs.
With a large amount of the activity being carried out within the funds, GPT’s capital requirements and risks are reduced.
Of the $3.3 billion pipeline, $1.8 billion is underway or planned, with an additional $1.5 billion of potential opportunities.

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The outlook for 111 Eagle St continues to improve.
Against a leasing target of 40% by practical completion, we have already achieved 49% signed Heads of Agreement or leases, so we are well ahead of target.
With an average of $805 per square metre and incentives of 25% for low to mid rise levels, we now anticipate our revised commerce may be exceeded.
GPT has around $82 million remaining spend until completion, which is expected to be in March 2012.

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Construction is well underway with the re-development of Highpoint. It will include 100 new specialty stores, David Jones, a new Woolworths supermarket, and an additional 1,000 car spaces.
The specialty leasing program is about to commence, with completion of the expansion expected to be in early 2013.

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We continue to receive awards for our leadership role in sustainability.
Our efforts have led to significant operational savings each year, and the ability to attract and retain great tenants.
Relative to our base year of 2005, our costs are around $13 million less each year as a result of our efforts.
In relation to the proposed carbon tax, at $23 per tonne, the impact on GPT, net of recoveries, is not material at an estimated $750,000 per annum. This is another benefit of reducing our energy usage.

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Our priorities have not changed.
We remain very focused on:
Closing the gap to NTA
Optimising our capital allocation processes
Enhancing our growth potential across the Group; and
Equipping our employees for high performance.

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So what is next for GPT?
To achieve our targets we will continue to work on optimising the business:
Delivering rental growth
Being disciplined about expenses
Managing our capital; and
Remaining focused on our portfolio returns.
But, to accelerate our performance, we will:
Grow our development activities
Expand our funds management business
Increase revenue from new sources; and
Continue to acquire assets where opportunities exist for accretion.

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Over the remainder of 2011, the way the global and domestic economic situation plays out will have a major role in determining the outlook for retail. It appears that market conditions will remain subdued, but GPT’s portfolio is well positioned and we expect retail sales across our centres will be between 2–3% for the year.
In the office sector, the outlook is positive, with prime rents forecast to increase, and firming valuations.
For Industrial, low supply levels will support ongoing rental growth, providing a solid platform for expansion in this sector.
As we announced on the 11[th] of August, for the full year we are confident of our EPS growing by approximately 7%, well above our target.
Our payout ratio this year will be no less than 80%.

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 In conclusion:

GPT’s Operating profit was $221.5m for the half, up 8%
We also delivered EPS growth of 8%, and DPS growth of 12%
Annualised Total Return was 7.4%, and
TSR was 10.6%.
Our focus on capital management has led to reduced debt costs and a successful buy-back program.
We have also delivered a long list of initiatives that have increased earnings and created value.
In summary, I’m proud to say that we have delivered on our promises in the first half of 2011 and are on track to achieve a strong result for the full year.
Thank you.

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The information provided in this presentation has been prepared by the GPT Group comprising GPT RE Limited (ACN 107 426 504) AFSL (286511), as responsible entity of the General Property Trust, and GPT Management Holdings Limited (ACN 113 510 188).

The information provided in this presentation is for general information only. It is not intended to be investment, legal or other advice and should not be relied upon as such. You should make your own assessment of, or obtain professional advice about, the information described in this paper to determine whether it is appropriate for you.

You should note that returns from all investments may fluctuate and that past performance is not necessarily a guide to future performance. Furthermore, while every effort is made to provide accurate and complete information, the GPT Group does not represent or warrant that the information in this presentation is free from errors or omissions, is complete or is suitable for your intended use. In particular, no representation or warranty is given as to the accuracy, likelihood of achievement or reasonableness of any forecasts, prospects or returns contained in the information - such material is, by its nature, subject to significant uncertainties and contingencies. To the maximum extent permitted by law, the GPT Group, its related companies, officers, employees and agents will not be liable to you in any way for any loss, damage, cost or expense (whether direct or indirect) howsoever arising in connection with the contents of, or any errors or omissions in, this presentation. Information is stated as at June 2011 unless otherwise indicated. All values are expressed in Australian currency unless otherwise indicated.

AI assistant

GPT GROUP Interim / Quarterly Report 2011

65009_rns_2011-08-25_a7052766-c04e-4b3d-bcea-975b449d7f0a.pdf

 In conclusion:

AI assistant

GPT GROUP — Interim / Quarterly Report 2011

65009_rns_2011-08-25_a7052766-c04e-4b3d-bcea-975b449d7f0a.pdf

 In conclusion:

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GPT GROUP Interim / Quarterly Report 2011