GPT GROUP - Interim / Quarterly Report 2012

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THE GPT GROUP

Speaker’s notes from 2012 Interim Result presentation

13 August 2012

Michael Cameron, CEO and Managing Director

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Good morning and welcome to the GPT 2012 Interim Result presentation.
Today I will talk about our strategy and the performance of the business, as well as the outlook for the remainder of the year.
Michael O’Brien will provide an overview of the financial results and capital management, and there will be time for questions at the end.

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GPT’s business model continues to produce strong performance and we are well positioned to deliver long term investment value.
Our active portfolio management is producing results, and
We continue to add to our capabilities while optimising the business.
Our effective capital management has again enhanced our performance and we are focusing on a range of growth platforms.

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It’s been a busy six months…
In the first half we delivered EPS growth of 6.2% and
DPS growth of 11.8%…
Income growth from the portfolio at 4.3%.
Our major developments at One One One Eagle Street and 5 Murray Rose were completed.
We sold a 50% interest in Casuarina and Woden to GWSCF and sold a two thirds interest in the Newcastle CBD site.
We acquired $115 million in logistics assets during the half.
We’ve reduced our forecast debt cost for the year by 50 basis points.
And I am pleased to announce upgraded guidance for full year 2012 to at least 7% EPS growth.

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Our three performance targets are designed to align with our investor goals.
EPS growth of 6.2% for the first half exceeded our target of CPI + 1%.
Total return of 9.2% has improved and is on track for the full year.
Total shareholder return was 10.4%.

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Our strategic focus remains unchanged: Optimise and Grow.
We continue to optimise the business to achieve our targets through:
Strong rental growth
Tight expense disciplines, and
Active capital and portfolio management
In addition, to accelerate our performance, we are now well underway with building our growth platforms, which I will talk more about shortly.

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Firstly, Optimisation.
Today we can announce that we have completed a significant review of GPT’s cost base and structure.
This has resulted in 70 people leaving the business over the last week representing around 15% of our work force. A small number of new roles have also been created to build further capability across the business.
The ‘Fit for Growth’ initiative is a critical element in our optimisation focus reflecting the outcomes of our process improvement work, and consolidation of the business over the past two years.
This will position GPT as one of the most efficient organisations in the sector, and will help in achieving our performance aspirations.

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The second area of our strategic focus is growth.
There has been good progress since the start of this year.
We have achieved growth of 16% in GPT’s funds under management;
Resources are in place to grow our development activity in logistics and business parks;
Our strategy to build new profit sources is underway, with work proceeding on a range of additional business opportunities; and
We have acquired $115 million of assets for our logistics and business park portfolio.
I will talk in more detail about our growth strategies toward the end of this presentation.

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I am pleased to announce changes to GPT’s Leadership Team that will establish further capability around our growth focus and will bring additional experience to the team.
I believe active career development and succession planning are vital and these changes are part of this approach.
I’m excited to advise that we are establishing a new team focused on growth and shaping the future of GPT, led by Michael O’Brien. Michael has delivered outstanding results in his role of CFO over the last three years.
Judy Barraclough, as Head of Strategy, will join Michael in this team.
This move represents our commitment to ensuring that GPT is best placed to adapt to the rapidly changing market landscape and capitalise on our strengths as we pursue our goal of delivering long term outperformance.
At the start of October, Mark Fookes will move into the role of CFO, from his previous role heading up Investment Management. Mark has deep experience across the business, which will be a strength in this broad role.
To replace Mark, I’m happy to announce that Carmel Hourigan has been appointed Head of Investment Management. Carmel will join GPT in November and will bring strong experience in property and funds management in both the direct and indirect markets. Carmel joins us from Lend Lease where she led the investment management business.
We are also building further capability around development in the logistics and business parks sector, one of the elements of our growth strategy that I will outline in more detail later. John Thomas, who has been working with GPT over the past six months will lead this business.
In our existing development business, Anthony McNulty will continue in his current role, with a change in title to Head of Retail Development and Major Projects. Anthony’s team will continue to focus mainly on portfolio enhancement, including current projects at Highpoint and Wollongong.

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I’ll start with the operating performance of the Group for the first half of 2012.
Realised Operating Income per security, which reflects our underlying operational earnings, was up 6.2% over the previous corresponding period, a strong result, ahead of the guidance we gave earlier in the year, and reflecting solid contributions from each of the operating divisions, a further reduction in our average cost of debt and earnings accretion generated by our security buy-back.
The statutory profit is also well up on the first half of last year, driven principally by upward revaluations of 111 Eagle St, Penrith and Sunshine Plaza, offset partially by a negative movement in the value of our interest rate derivatives due to a further significant decline in interest rates over the course of the half.
Distribution per security is up a very strong 11.8% as a result of the strong EPS growth but also because the payout ratio, at 80% for the half, is slightly higher than the first half last year.
We have committed to a payout of no less than 80% of realised operating income this year.

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Turning now to the composition of the operating result.
Retail income was up 3.9% on a like for like basis, driven by strong growth at Charlestown Square as a result of a reduction in development related vacancies; and at Melbourne Central reflecting the successful completion of the food court development undertaken last year and continuing solid rental growth across the asset.
The Office portfolio also performed very well with comparable income growth of 5.6%, largely as a result of the average occupancy across the portfolio increasing to 96.1% compared with 95.2% in the comparable period last year. The increased occupancy drove particularly strong results at 2 Park Street in Sydney and at Melbourne Central.
Logistics & Business Parks was up a solid 2.5% on a comparable basis with income growth across the vast majority of assets offset by some vacancy at two of the smaller assets at Olympic Park.
Funds Management income was down as a result of the sell down of GPT’s stakes in the two funds completed late last year but distribution per unit growth was up 4.2% across the office and shopping centre funds.
Interest expense was lower as a result of a lower debt balance, as asset sale proceeds were received, but also because of further progress on lowering the average cost of debt.
The weighted average number of securities has reduced as we have continued with the buy-back program.

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This waterfall chart shows the composition of the growth in EPS.
You can see that the majority of the uplift was driven by income growth through the portfolio, with some benefit coming from a lower cost of debt compared to the June half last year, and some earnings accretion from the buy-back.
This was offset by the sale of our US Seniors Portfolio and Ayers Rock Resort in the first half of last year and a reduction in our tax benefit.
All of that combined to deliver 6.2% EPS growth.

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Our focus on our expense base continues – and on keeping as big a gap as possible between our income and our expense growth.
Management expenses are up marginally on the first half last year, and with the implementation of our ‘Fit for Growth’ program we anticipate that the ‘Jaws’ will be wider for the full year.

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As Michael mentioned earlier, we implemented the results of a major review of our cost and resource base last Friday, which we called ‘Fit for Growth’.
The review built on the work that we have been doing to streamline the business over the past couple of years. With process improvements and new systems now bedded down, it was an appropriate time to undertake a comprehensive review to ensure that our resource base matches our operational requirements, whilst also providing a strong platform for growth.
In addition to identifying further savings in operational expenses across the business, the review will result in a net headcount reduction of 60.
The key areas impacted were:
Asset Management, our largest division, where there has been a significant restructure, including the merging of our operational and development leasing teams;
Development, acknowledging that our retail development pipeline is reduced; and
Finance which is the principal beneficiary of the investment we’ve made in our new general ledger system and in the ongoing simplification of the business.
As a result of the review we expect an earnings benefit (post tax) of approximately $2m in 2012 and $10m on a full year basis.
Redundancy costs associated with the review, are expected to be $6.6m, which, due to their non-recurring nature, will not impact Realised Operating Income in 2012, consistent with our ROI policy, but will be included in the Statutory Result for the year.
The impact of the review will substantially reduce our Management Expense Ratio to around 50 basis points.

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The balance sheet remains in great shape, with gearing as a proportion of total tangible assets at 20.2% following the completion of the sale of our interest in Woden and half of our interest in Casuarina to the GPT Wholesale Shopping Centre Fund.
Look through gearing is only marginally higher than our headline gearing and looks through to the gearing within the wholesale funds, which at 15% in the office fund and 31% in the shopping centre fund, remain modestly geared. Gearing in both funds will reduce in the second half following the completion of planned equity raisings.
Interest cover is at a very healthy 4.7 times and NTA is up 6c against December 2011 due to the positive revaluations across the portfolios and the uplift to NTA created by our buy-back; outweighing the negative movement in the value of our derivatives.
Our credit ratings remain at A-, A3 (stable) providing us with cost efficient access to the debt capital markets.

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Capital management has been a big focus for us over the last few years and has created a lot of value for security holders.
There are 4 principal levers we are focussed on to drive Return on Equity.
Firstly Active Portfolio Management: we discussed our preferred sectoral weightings at our Investor Day 6 weeks ago and we continue to work towards these. But we’re also actively recycling capital within the portfolios.
Secondly Effective Debt Management: we have extended our average term to maturity and diversified our debt sources, whilst reducing our cost of debt so that we’re generating positive leverage and that is flowing through to earnings.
Thirdly our Security Buyback: we have purchased 4.8% of securities on issue at a 15% discount to NTA, generating both earnings and NTA accretion and we will continue it opportunistically.
Finally the leverage provided by our Funds Management business: we have reduced our stakes to close to 20%, increasing our return on capital invested.

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You can see on this graph how we have worked down the average cost of debt over the last couple of years - and we have achieved that through a combination of treasury initiatives as well as benefitting from a reduction in interest rates over this period.
In the 6 months to June 2012 we have delayed the commencement and lowered the margin on some loans and, terminated some of our more expensive interest rate swaps off the back of sale proceeds.
Consequently we are forecasting a full year average cost of debt (which includes all fees and margins) of 5.7%, 50 bps lower than our full year forecast provided in February.

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Our debt maturity profile remains long and relatively flat with a weighted average term to maturity of 5 years following the $100m extension to our 7 year bond issue which we completed in July at an all-in rate of 5.5%.
That extension doubled our weighting to domestic bonds to 28%, increasing our diversification.
I am pleased to announce that we completed a privately placed MTN issue last Friday for $33m for 10 years at a 225bps margin over swap, further increasing our diversification and tenor.

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Driving returns for security holders within a disciplined, relatively low risk framework is ultimately what we are working to achieve.
These two graphs illustrate that we are making progress.
We have achieved strong EPS growth by removing a number of the drags that were holding back our earnings and in terms of total return, 2011 was impacted by derivative movements, however, we are on track to achieve our target of 9% for this year.

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Thanks Michael.
At our Investor Day on 27 June we provided insights into our target portfolio weightings.
As you can see, we have already made progress in shifting the portfolio towards our targets of 50% retail, 35% office and 15% logistics & business parks.
The strategy reflects our outlook for each part of the portfolio, which favours a more balanced weighting in the medium term.
We remain strong believers in all three sectors.

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In the first half, GPT’s $8.4 billion balance sheet portfolio performed well.
Comparable income growth was 4.3% and the average lease expiry remains long at 4.7 years.
The weighted average cap rates all tightened to an average of 6.61%.
Together with high occupancy, each part of the portfolio benefits from structured rental increases.
The increases over 2012 are shown on the slide:
86% of the retail portfolio with a 4.5% increase,
83% of the office portfolio with a 4.0% increase, and
78% of the logistics & business parks portfolio with a 3.4% increase.

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Retail continues to deliver a solid operating performance
Comparable income growth was up 3.9% even though sales growth remained virtually flat. This pushed occupancy costs slightly higher.
Specialty sales grew to $8,981 per square metre, and occupancy moved marginally, but remains high.

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Looking at a further level of detail,
99.1% occupancy represents only 40 vacancies out of 3,700 tenancies.
We are pleased with the leasing progress at Charlestown, reducing from 25 vacancies to 10.
Re-leasing spreads year to date are -6% but are a result of us insisting on maintaining 4.5% structured rental growth within new leases.
Holdovers represent 1% of base rent, and are mostly in non-GPT managed centres.
Arrears remain low, and the valuations of the portfolio again increased during the six months, with a $55.1m uplift.

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Retail sales growth is at a low point in the cycle due to economic uncertainty and subdued consumer sentiment.
Even month to month there is significant volatility reflecting events such as the timing of Easter and the impact of the carbon tax compensation payments.
Despite this, as this graph shows, retailer margins are at their highest level over the last decade.

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Of more significance are the structural changes occurring within retail, such as the growth in online sales, the potential harmonisation of prices, and changing consumption patterns.
These present both threats and opportunities for GPT.
We are continually evolving our shopping centres with:
Active retail mixing;
Adapting centres to meet changing consumer demands; and
Use of digital media to deepen relationships with customers.
Together these activities will help our shopping centres continue to attract a high level of visitors.

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A good example of the strength of quality centres is Highpoint in Melbourne where the centre is currently expanding 25% in size.
Leasing for the new space at Highpoint is progressing well with 70% of the 100 new specialty shops already leased to high quality domestic and international brands.
I am pleased to say that Topshop has agreed in principle to open their second Australian store at Highpoint, their first store in a shopping centre in Australia, with other major international leases soon to be announced.

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In our Office portfolio, income growth was strong in the first half, although this was boosted by the timing of leases and is expected to be closer to more normal levels for the full year.
Similarly, occupancy at the 30th of June was affected by 111 Eagle Street coming on line.
Heads of Agreement signed since June puts occupancy over 95%.
Weighted average lease expiry continues to be high and
…our NABERS energy rating (including green power) of 5 stars remains the highest in the sector.

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There is currently a lot of focus on the Sydney prime market, however, the GPT expiry profile sits favourably against changes in market supply over the next few years.
As you can see, supply will peak in 2015 following the completion of the first two towers at Barangaroo, but GPT is well placed with most of its main expiries occurring before that time.
The leasing team continue to work hard to manage these risks, and I am pleased to announce that Citigroup has signed a non-binding Heads of Agreement for a new lease for 10 years, which will improve the expiry profile.

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The outlook across the CBD markets is mixed, with demand in Melbourne slowing quicker than expected, Sydney being impacted by downsizing in the financial services sector whilst Brisbane is still experiencing positive net absorption.
We expect Sydney rental growth to remain steady just below 2%, with occupancy levels continuing to increase.

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One One One Eagle Street was officially opened by the Queensland Premier, Campbell Newman, on 1 August in front of 400 people.
The launch was a milestone event. When I joined GPT in May 2009 in the middle of the GFC many of our stakeholders questioned why we didn’t shut down the site, cover it with black plastic, and wait for better days. We didn’t, and even with the impact of the major floods last year the project was able to reach completion earlier this year.
As you can see on this slide, following the recent external valuation, total profit to GPT from this project was $43.9 million, delivering a development margin of 19.7%.
I would like to personally thank Jamie Nelson, the Development Manager responsible for this project, for his contribution.
Since completion, leasing has progressed well with 82% of the building now committed. On Friday the final documentation for the Arrow Energy lease was completed, representing Brisbane's largest ever Premium Grade deal. A great outcome.

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Our recently renamed Logistics & Business Parks portfolio performed solidly over the half with income growth of 2.5% and good leasing activity.
Occupancy remains high at 99% with a long weighted lease expiry of 6.1 years.
The portfolio has benefitted from cap rate compression of 11 basis points over the past year.

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Since the beginning of the year we have added $178 million of assets to our logistics & business parks portfolio.
The further expansion of this portfolio will be achieved by more acquisitions, as well as the development of our land banks at Erskine Park, Somerton and Sydney Olympic Park.
The process of growing the portfolio to 15% could be accelerated if a suitable portfolio of industrial assets was acquired.

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Underlying fundamentals remain positive in the logistics and business park market with limited supply, low vacancy and positive demand.
Pre-lease enquiry has also improved but has been slow to convert into deals.

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As I mentioned, 5 Murray Rose was completed in April, fully leased to the Lion Group for 12 years.
The stabilised development yield is 8.5% and we made a $5 million development profit.

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Let me now complete the story on the growth initiatives.
As we have shown, the core business can deliver EPS growth of CPI + 1%. But opportunities exist to exceed those expectations.
For investors, while GPT will continue to provide direct exposure to high quality property assets, our growth platforms of funds management, development, new profit sources and asset acquisitions will enhance and accelerate our returns.
Our target is for these platforms to generate meaningful levels of additional recurring profit and value.
Importantly, we will not change the risk profile of the business.
The growth initiatives will be in our existing sectors, within Australia and will not require significant capital.

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In funds management, our target is to double the profit contribution from the business.
This will be achieved via two pathways:
Firstly, growing the existing funds. This will be achieved through both acquisitions and developments.
Secondly, the creation of new funds, starting with a logistics wholesale fund that will be established once the target weighting is achieved on balance sheet.
A large amount of time is also being spent exploring the potential for other funds and various other wholesale structures, such as clubs. Announcements will be made in due course.

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We are already delivering on our plans to increase the size and quality of our existing funds.
We grew by $890 million in the first half of 2012.
With these acquisitions, along with selected divestments, the quality of the funds continues to improve.
We also commenced a capital raising in the shopping centre fund, with an office fund raising to follow.

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With development, we have a dual approach.
Firstly, we will continue to enhance and preserve the value of our existing assets with a focus mainly on retail.
Secondly, we are building further capability for logistics and business park development. This will help us achieve our target weighting on balance sheet and provide the option to retain or sell assets for a profit.
The types of logistics and business park developments will remain consistent with our current strategy:
Focused on major eastern markets that are supported by distribution networks
Mainly pre-committed tenants
Continued development of existing land banks; and
Aligned with our investment philosophy and risk appetite.
Without impacting GPT’s cost of capital or risk profile, our target is for the logistics and business park development business to contribute up to 5% of total earnings.

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We identified new profit sources as a growth platform and earlier this year we appointed Sam Nickless to accelerate these opportunities. Sam’s background with McKinsey, and several major corporates, positions him well to bring these activities to life.
We have talked previously about GPT Energy and other ideas, and we are now actively pursuing a range of business opportunities that have exciting potential.
These opportunities leverage both the tangible assets and the intellectual property of GPT, and seek to generate revenue from services to existing and new customers.
GPT Energy is one example of a new profit opportunity. By installing embedded energy generation technology we can create additional earnings for GPT and reduce energy costs for our tenants. The pilot at Charlestown Square has proved this can deliver substantial benefits, and we are now making plans to roll it out to other assets.
Another example is through our Digital Strategy, which we announced in June. We will progressively launch features of this strategy between now and Christmas this year which will have the potential to generate additional income.
A number of other opportunities are under review and will be rolled out subject to our normal investment criteria.

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A culture renewal program has been underway over the last year.
The exercise was commenced to shift us further towards a culture of achievement and accountability.
As part of this program, GPT has adopted seven cultural values which are now being embedded throughout the business.

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Before I conclude, a couple of comments on the outlook for our earnings and value drivers.
Structured rental increases and high occupancy will drive steady growth in income, particularly following the completion of 111 Eagle and the Newcastle CBD sale.
Fee income will increase as the Funds Management business continues to grow.
Costs will benefit from a disciplined approach, our ‘jaws’ philosophy, and ‘Fit for Growth’ initiative.
Average cost of debt is expected to be 5.7% and we will continue to be opportunistic with the security buy-back.
I expect valuations across our portfolio to remain stable.

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At the start of the year I said we would deliver at least CPI + 1% in EPS growth. Having exceeded our target in the first half, I am now confident GPT will deliver at least 7% EPS growth for the full year.
Our payout ratio will be no less than 80%.

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In conclusion,
GPT is well positioned to deliver long term investment value.
Our active portfolio management has delivered strong performance, and
We continue to add to our capabilities.
Our effective capital management has again enhanced our performance and together with our growth focus, puts us on track to becoming…
Australia’s best performing property company.

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GPT GROUP Interim / Quarterly Report 2012

65009_rns_2012-08-12_72d8aa93-e04a-4f84-b137-c7f8658b3a88.pdf

THE GPT GROUP

Speaker’s notes from 2012 Interim Result presentation

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GPT GROUP — Interim / Quarterly Report 2012

65009_rns_2012-08-12_72d8aa93-e04a-4f84-b137-c7f8658b3a88.pdf

THE GPT GROUP

Speaker’s notes from 2012 Interim Result presentation

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GPT GROUP Interim / Quarterly Report 2012