GPT GROUP - Interim / Quarterly Report 2013

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Good morning everyone and thank you for joining us for GPT’s interim result presentation.

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Today you will also hear from Mark Fookes and Carmel Hourigan, and there will be plenty of time for questions at the end of the presentation.

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The most important thing the team at GPT can do is allocate capital to deliver the best returns to securityholders.
We try not to be bound by conventional wisdom, and our objective is to make sure every dollar invested drives total returns.
We seek to be hyper-efficient and this can be seen in the significant reduction in overheads; and
Our goal is to have an entrepreneurial culture, and stay flexible and opportunistic.

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The returns on our assets are maximised through capital allocation and portfolio management.
Our earnings are underpinned by stable income streams, which are enhanced by our growth platforms. Our management expense ratio is one of the lowest in the sector and we remain disciplined in our capital management.

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The objective is to increase value per share and, not focus on size. This is reflected in our acquisition and divestment strategy where we remain very disciplined about where the next dollar will be spent.
Buying back shares does not signal a lack of investment opportunity, or weakness. It provides a very useful benchmark when considering investment opportunities.
Our focus, is on making decisions to deliver the best outcome for securityholders over time.

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We have invested time this year on our five year strategy, and I look forward to providing an update in October.
Recognising we already do a lot of things right, the strategy will be about evolution, not revolution.
It’s obvious to us that the allocation of capital is the single biggest driver of total returns.
We understand Australian core property. That will continue to be our focus, but we must be flexible and opportunistic. We won’t be bound industry convention.
We need to be frugal. We need to be entrepreneurial, and we need to satisfy the aspirations of investors and tenants.

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It was another busy six months.
We completed $690 million of transactions, exiting Erina Fair and our Homemaker portfolio. We acquired Figtree Drive, and GWOF acquired half of 8 Exhibition Street in Melbourne.
We made progress diversifying our sources of debt and lengthening tenor through a HKD issue and a USPP.
Our development team successfully completed Highpoint and 161 Castlereagh Street.
Our funds management business continues to grow, and GWOF and GWSCF were the two top performing core wholesale funds over one year. GWSCF has raised an additional $230 million and is well on track to achieve its targets.
We also extended our buy-back and remain active in acquiring securities when accretive to NTA and earnings.

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The EPS growth for the six months was 6%.
Total return of 8.6% was just below the target of 9% reflecting the impact of valuations for Dandenong and Charlestown.
TSR was 10.2%. The decisions we have been making will enable us to achieve our target of leading the sector.
Let me now hand over to Mark Fookes.

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Thank you Michael.
I’ll start with our operating performance for the half.
Realised operating earnings per security, which reflects our underlying performance, was up 6%. This is ahead of our guidance for the year, with a solid contribution from the investment portfolio, a significant improvement from the operating divisions and a lower cost of debt.
The statutory profit was down 6.7% from the prior year, with a lower uplift in portfolio revaluation offset by a positive movement in the marked to market of our derivatives.
The distribution per security is up 6.3%, with a distribution for the half of 10.1 cents.
As previously announced, this is the last quarterly distribution to be paid, with the next distribution being for the six months ending 31 December 2013.

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Focusing now on the composition of the operating result.
Retail Income was lower, primarily as a result of the divestment of the Casuarina and Woden interests last year and the smaller impact of the divestment of the Homemaker portfolio and Erina Fair this half, with comparable income growth of 1.5% over the period.
Office Income increased with the inclusion of One One One Eagle Street for a full period, offset by a small decline in comparable income growth of 0.7%.
Logistics & Business Parks Income increased with a number of acquisitions, the inclusion of 5 Murray Rose for a full period and comparable income growth of 3.2%.
Wholesale Fund distributions were up as GPT held a higher interest in the Shopping Centre Fund relative to the prior comparable period.
Management company fees increased as funds under management continued to grow. We also saw a significant reduction in expenses which I will talk further about shortly.
The interest expense was lower as a result of a 96 basis point reduction in the average cost of debt and a lower average debt balance.

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We typically talk about JAWS in respect of our expenses and this remains a key long term target for the group.
However today I wanted to focus on the overall expense reduction we have achieved in the past year. Expenses have declined by 30%, with the biggest savings seen in Asset Management and Development as a result of the ‘Fit for Growth’ initiative and our ongoing focus on cost and process optimisation. The $13.1 million corporate overhead includes $1.3 million relating to the Australand bid.
The reduced expense base combined with increasing external management fee income means the operating divisions are on track to move to profitability in 2013.
With assets under management of $14.8 billion, this year we are forecasting to achieve an MER below 50 basis points, which is one of the lowest in the sector.

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GPT recommenced its security buy-back this half, acquiring 25.2 million securities bringing the total buy-back to 6.1% of issued capital. To date securities have been acquired at an average 14% discount to the June 30 NTA creating $50.4 million of value for securityholders. We continue to see the buy-back as an investment benchmark at levels accretive to NTA and earnings.
We often get asked about whether we will increase our payout ratio.
It is important to note that whilst GPT pays out 80% of its realised operating income, this equates to approximately 100% of cash earnings or AFFO. We believe it is prudent to fund the capital required to keep the portfolio at it’s high level of quality from retained earnings.
In 2014 GPT plans to adopt the PCA definition of FFO for our headline earnings, replacing ROI. In addition our distribution payout policy will become 100% of AFFO in 2014.

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We continue to have a fortress balance sheet.
Net tangible assets increased to $3.76 over the period.
Gearing as a proportion of total tangible assets is 19.9%. The Office Fund continues to have low gearing of 12.4% and the Shopping Centre Fund gearing has reduced to 22.0% following the receipt of additional funds from its capital raising.
The weighted average cost of debt increased slightly to 5.21% and the weighted average term to maturity increased to 6.6 years as a result of the HKD and USPP bond issues. We currently forecast a weighted average cost of debt of 5.4% for the full year, 10 basis points below the guidance provided in February.
The weighted average term of interest rate hedging increased by 4 years on account of a number of hedges being entered into in the first half. Our hedge profile is now vanilla with a flat profile of approximately 80% hedging, and no legacy derivatives in place.
The balance sheet provides GPT with significant flexibility to act quickly upon value enhancing opportunities with an overall focus on maximising total returns for investors.

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We have made significant progress on both increasing the diversification and tenor of our debt facilities in the first half.
Bank debt is now 49% of our borrowings, down from 66% at December.
Bonds now make up 51% of the portfolio on account of the two offshore issues during the half:
In February we announced a HKD$800m 15 year issue at 195 basis points over BBSW.
In March we announced a USD$250m 12 and 15 year issue at 170 basis points over BBSW.
Together these issues have increased our average term to maturity by over 20%
We have no refinancing until the second half of 2014 which is covered by forward start loans already in place and our debt maturity profile remains very flat.
I will now hand over to Carmel.

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The first half of 2013 has been a difficult operating environment. To meet these challenges and position the portfolio for long term performance, we have remained focused on executing a disciplined strategy of improving quality and implementing the right asset management strategies across the sectors.
This active approach has seen a total of $590m of assets sold since December 2012 and a portfolio total return for the 12 months of 8%.
We have also continued to refresh the portfolio with the acquisition of 3 Figtree Drive Sydney Olympic Park and 8 Exhibition Street, Melbourne and the completion of developments at Highpoint and 161 Castlereagh Street. These developments offer space and a retail experience designed to meet the changing requirements of users.
In addition, we have commenced planning for the repositioning of the MLC Centre. This asset offers a unique precincting opportunity in Sydney CBD.
Overall portfolio stats remained resilient with a WALE of 4.9 years, occupancy of 98.1% and a weighted average capitalisation rate of 6.53%.

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The 12 month total return for the portfolio was 8%, reflecting a net revaluation uplift of $108m. The revaluation for the June half was $20m of which approximately 60% was driven by cap rate movement. This cap rate tightening was predominantly in premium office assets.
The office and logistics sectors both recorded positive net revaluation movements underpinned by leasing success and extensions of WALE.
The office sector recorded the strongest performance with a total return of 9.8% over the 12 months, supported by strong valuations at Australia Square, Melbourne Central Tower, 818 Bourke Street, and within the GWOF portfolio.
The total return for the retail portfolio was 7.1% for the year reflecting predominantly the increase in valuation for Melbourne Central and Casuarina in December and the devaluation of Charlestown and Dandenong in June.
The logistics & business parks portfolio performed well with a total return of 9.1%.

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This chart illustrates the relationship between the office sector WALE and total return for the 12 months to June 2013.
This reflects the reward for de-risking cash flows which has been a key element of our active management approach.
Particular success has been in those assets that have had major lease renewals such as 2 Park Street, Melbourne Central Tower and Australia Square.
This is the same trend as we are seeing in the logistics portfolio, where opportunity remains to actively manage and acquire assets to reposition and achieve total return outperformance.

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Turning to the retail portfolio.
Comparable income growth slowed over the half to 1.5%. This was primarily driven by a continuation of negative leasing spreads across the portfolio reflecting difficult trading conditions.
At an asset level, results were mixed with a strong contribution from Melbourne Central which delivered 3.9% growth, whilst Charlestown delivered negative growth as we continue to stabilise the asset.
To offset slower sales growth we have increased our focus on efficiencies to drive earnings. We anticipate like-for-like income growth to be higher for the 12 months to December 2013 as the benefit of these initiatives are realised.
Retail sales remained modest with annual specialty sales up 1.1% whilst Centre sales were up 1.0%, an improvement on June last year.
The WACR is stable at 6.03% whilst the occupancy remains high at 99.5%.

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Our leasing team continues to actively remix the tenancy profile, with the aim of securing the right tenant in the right location and structured rental increases.
Over the first half we saw the introduction of 155 new tenants out of 330 leasing deals. Of deals completed a leasing spread of - 5.8% was achieved, which equates to approximately $1.3m in annual net income.
Generally new leasing deals in 2013 within the GPT managed portfolio achieved an average annual increase of 4.8% per annum.
2013 represents the five year anniversary of the Rouse Hill development. Strong tenant demand has seen more than 50% of the 106 specialty renewals secured and the centre is performing well with sales up almost 4%.

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Retail spending has been subdued over the past three years as a result of cyclical and structural factors. It is critical that our strategy continually responds to these challenges in what will be a modest growth outlook.
We are seeing retailers embrace these challenges by making supply chain improvements, implementing Multi-channel strategies, and improving product and customer service. We are starting to see the benefits of this flowing through into improved profitability and performance.
GPT has also been very active in addressing these changes by focusing on growing market share of sales, cost efficiencies, minimising risk and ensuring our assets meet the future requirements of our customers.

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With regards to growing market share, management is focussed on active remixing towards the growth categories such as food catering, retail services, and experienced based retail.
Our social media strategy continues to evolve with Highpoint the most liked shopping centre in Australia. This digital strategy has allowed us to significantly reduce marketing costs with digital marketing almost replacing print marketing at Melbourne Central.
Finally, we have entered into a new guest experience contract from 1 July across the portfolio where we are moving away from the traditional security, maintenance and cleaning management model to a hospitality and experience focus.
On the expense front, recoverable expenses are forecast to reduce over 2013, through sustainability initiatives, and management synergies between retail, office and logistics.
These activities position the portfolio well for the future and provide sustainable benefits.

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The sale of GPT's 50 per cent interest in Erina Fair for $397 million in June was a great result.
Erina has delivered solid returns since GPT's purchase of the Centre in 1992 and the subsequent expansion to super regional status in 2003.
The decision to sell reflects the disciplined approach to portfolio optimisation we are taking and maximising total return at the asset level.
The sale proceeds will be reinvested into acquisition opportunities which we believe will deliver superior returns.

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The Highpoint development completed earlier this year is a great example of how shopping centres in the right market with the right mix of retailing, experience and theatre continue to be in demand by retailers.
Highpoint is the first centre in the country to offer both Zara and Top Shop, together with other leading international brands such as Apple, Samsung, and Chanel.
These brands together with the Australian designer precinct are all performing to expectation.
Monthly customer traffic is up 30% since the development opened, and sales in the original part of the centre have also improved.
The development has delivered a $140m revaluation uplift to date and is due for revaluation in the second half of 2013.

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A modest level of retail sales growth is anticipated over the remainder of 2013 as consumers remain cautious about the outlook for the economy, job security and as structural impacts unwind.
Several growth drivers are expected to support retail sales growth over this period:
The impact of low rates has begun to wash through the economy. Since June last year the share market and house prices have been trending upwards. Consumer confidence has recovered from the lows of 2012 and has stabilised in recent months.
Additionally, recent softening of the dollar will provide assistance as the incentive to purchase internationally is reduced.
Looking longer term, should IMF forecasts of stable GDP growth be realised, we anticipate an improving retail environment and for sales growth to trend back toward historic levels (albeit slowly).

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The office portfolio remains in a solid position.
Our strategy has been to focus on tenant renewals and address future expiry risk which has resulted in an increased WALE and a reduction in our 2014 expiry profile.
Comparable income growth was down slightly for the six months. This reflects largely our strategy to retain and reduce active churning of tenants within the portfolio, in line with weakening market conditions. As a result leasing surrenders were down from the previous period.
In addition, average occupancy was lower and despite GWOF having the strongest total return in the office sector, its like-for-like income growth was negative 3.4% also reflecting lower occupancy.
The repositioning work done over the past 12 months has led to a strong total return of 9.8%.

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Over the course of the year we have seen further deterioration in all markets which is reflected in negative net absorption. The office team has continued to focus on de-risking the portfolio in light of these challenging market conditions.
The 2014 expiry has been the focus for our in house leasing team and significant success has been achieved. As at 30 June, the expiry profile had reduced to 11% from 20% 18 months ago.
This is likely to reduce further with negotiations underway at Melbourne Central Tower.
As a result the WALE has increased to 5.6 years.
Despite this great work, there is a lot to be done and we are very focused on the vacancy in One One One Eagle Street and the near term expiry in MLC Centre and Governor Macquarie Tower.
I will touch on the repositioning of MLC Centre in a moment.

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Two assets where we have had significant success in driving outperformance are Australia Square and Melbourne Central Tower.
At Australia Square we have renewed 3 major tenants in the building in the past six months, increasing the WALE to 5.5 years and reducing the 2014 expiry to 10% from 24% 2 years ago. This has resulted in a $13 million uplift in value and a 12 month total return of 11.1%.
At Melbourne Central Tower 58% of the building has been released over the past 3 years, and importantly the two major expires in 2014 have been renewed. This has resulted in a valuation uplift of $26 million and a total return of 15.2% for the past 12 months.
These case studies provide tangible evidence of our active management approach and leasing capability.

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The main contributors to our existing vacancies are Melbourne Central Tower and One One One Eagle Street.
For both of these assets, we remain confident in the product and price offering. In addition we have bolstered our leasing initiatives, introducing flexible work spaces, speculative fitouts for space < 1000sqm and increased our market coverage
The main vacancy for the remainder of 2013 is the Freehills expiry at MLC Centre. The space is being actively marketed and it is being shortlisted for a number of requirements. Importantly the price point, product offering and marketing collateral is enabling us to maximise any opportunities.
2014 expiries are focused around the space at 2 Park Street, the CSA lease expiry at Melbourne Central where we are currently in negotiations, and the State Government at Governor Macquarie Tower.

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The office team is working hard to ensure we are driving the best possible leasing and asset management outcomes.
GPT’s significant exposure to the east coast prime asset market provides market intelligence and exposure to all market enquiries enabling us to respond quickly to changing market conditions. This is reflected in the leasing up of One One One Eagle Street and Melbourne Central Tower prior to the recent decline in both of these markets.
The recent internalisation of GWOF assets will further enhance our market reach and tenant relationships.
Our asset knowledge against our competitors is essential. We ensure that our assets have addressed all minimum requirements by our target tenant set. This enables us to position assets ahead of the competitors and broaden our target markets.
Customer relationships are a key focus. We ensure that we are closely engaged with all market participants, and we actively target non traditional CBD tenants.
Finally, we are also focused on maintaining an understanding of changing workplace practices such as flexible working and densification. In this regard we have ensured our buildings are physically able to meet design standards.

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The MLC Centre is a good example of the work we are doing to maximise asset performance.
There are four areas of focus to reinvigorate the precinct including the office tower refurbishment and leasing, façade remediation, precinct activation and branding and retail redevelopment.
Our leasing strategy is focused on mid-tier business services firms with the location, precinct amenity, price point and programme works being a point of difference.
The works include office lobby upgrades, plaza upgrades and a retail redevelopment that will include laneway activation.
The façade remediation works are progressing well. The structural platforms and mast climbers are in place and work has commenced. Completion is expected in the second half of 2015.

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White collar employment growth remains weak across most office markets.
Despite this weakness, forecasters are expecting an improvement in growth in financial year 2014 although below historical averages.
Each market has a different employment base and as such are expected to experience varying levels of demand.
For Sydney, we expect continued weakness for the remainder of this calendar year however at a slower rate of decline.
Melbourne entered the downturn much earlier than other markets and as a result has experienced a mild recovery in white collar employment growth in 2013. Its diversified employment base will assist in a mild recovery over the next 12 months.
Brisbane is one of the weakest CBD employment markets. This was led by government cut backs and a slowdown in the mining sector. We expect the worst of the cutbacks to be over.

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An analysis of historical net absorption and the correlation between equity markets provides further supporting data suggesting the worst of the declines in base office demand may be behind us.
Over the past 40 years there have only been two periods where .
negative net absorption was recorded for multiple years
In this downturn there has been 170,000 sqm of negative net absorption recorded for the 12 months, reflecting 1.1% of existing stock compared to 2.7% in early 2000’s.
Equity markets are a leading indicator of office demand. Despite a strong historical correlation a divergence has emerged over the past six months.
Despite these positive leading indicators we are yet to experience a material change in leasing conditions in our key markets. We remain cautious and do not expect a material recovery this calendar year however are optimistic of a recovery during 2014.

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The logistics portfolio continues to deliver with steady asset growth, a 9% total return, robust income growth and high occupancy levels.
The portfolio WALE is strong at 5.4 years and will increase significantly on completion of the Toll NQX development in February 2014 and development deals that we will discuss in a moment.
Over the next three years, the portfolio is in a strong position with less than 10% on average expiring per annum. The team continue to focus on pushing out expiries in later years.
The portfolio capitalisation rate sharpened slightly to 8.27% as a result of cap rate compression at Austrak Business Park Somerton.

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Our logistics and business parks business has significant capability, reflecting the importance of this business to the Group.
The investment management portfolio, led by David Burgess, has responsibility for delivering on the overall performance of the portfolio.
The logistics & business parks development team led by John Thomas continues to grow in size and this has been reflected in the success the team has made this year in building up this business.
Finally Matthew Faddy leads a dedicated asset and property management team, managing 29 assets across the eastern seaboard markets.

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We are very pleased with the progress of up-weighting our industrial portfolio. Since we announced our strategy in 2012 the value of product acquired, developed or in a preferred position represents a 60% increase in total portfolio value.
Since the beginning of 2012 we have acquired $218 million in investment assets.
The development of the land bank has accelerated, with the Group being in an exclusive position on three opportunities at Erskine Park. If successful, this will provide $234 million in completed pipeline.
Our strategy of developing assets with long term WALE and buying well located logistics facilities on market that through our in house expertise we can add value continues to be executed.
If successful on current exclusive opportunities, the logistics portfolio will have increased by approximately $500 million, achieving the 15% target weighting.

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Fundamentals in the logistics sector remain balanced.
This chart is showing the growth in enquiry levels in the western Sydney industrial market
Notably there has been a material improvement in tenant demand in the pre lease market in western Sydney, however conversion remains difficult.
Supply remains below historical averages although in some areas there has been a slight increase in speculative development.
Demand for core logistics product continues to be robust although as with other sectors yield compression is only evident in prime de risked assets.

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Thanks Carmel.
One of our priorities for 2013 has been to build on our growth platforms. We have outlined the individual initiatives on previous occasions and the next few slides provide an update on each one.

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Profitability has continued to improve for our funds management business.
GWOF and GWSCF were the top two performing funds in the core wholesale sector over one year. This is a tremendous achievement. It reflects the high quality of our funds and the capabilities of Nick Harris and his team.
GWOF acquired half of 8 Exhibition Street in April and the development of 161 Castlereagh Street was completed in June. We also received approval to internalise property management for GWOF wholly owned assets, and One One One Eagle Street.
GWSCF launched the second stage of its capital raise and received $230 million from a mix of existing and new investors. It has now raised $391 million and is on its way to achieving the target of $500 million.
The total FUM has grown at an annualised rate of 18%.
As you know, GPT is working on a number of new product opportunities and we will continue to keep you up to date with progress.

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The Retail & Major Projects business has delivered on two key developments.
The $300 million expansion of Highpoint has resulted in a value uplift of $140 million divided between GPT and the co-owners.
The $780 million development of 161 Castlereagh Street has delivered a $25 million valuation uplift for GWOF which owns half of the asset.
Wollongong Central and 150 Collins Street are on track for completion in 2014.
There has also been good momentum in Logistics & Business Parks.
60% of the land bank has been activated with pre-lease deals in place with an end value of $234 million.
There is significant enquiry on the rest of the land bank
Construction of 3 Murray Rose will commence shortly with an end value of approximately $72 million.
These projects will achieve our target weighting of 15%.
Both Anthony McNulty and John Thomas have made good progress in 2013.

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We continue to develop our new profit sources.
Innogen is now fully operational and working successfully at Charlestown Square:
Four new projects are underway at Highpoint, Melbourne Central, Parkmore and Chirnside.
The Innogen business is expected to deliver income of around $2.3 million in 2013.
The LiquidSpace platform has gone live in Australia and we are starting to lock in venues and users.
These activities are consistent with our goal to deepen our tenant relationships beyond just space.
They also provide valuable insights, and the potential to create material value over time.

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GPT has completed $1.7 billion of transactions over the past 18 months. We have made tangible progress towards achieving our target portfolio weightings.
With incremental debt costs below 5%, and property yields well above that, every acquisition opportunity we see is obviously earnings accretive.
We have been very selective with acquisitions, notwithstanding the strength of our balance sheet. Some of our divestments have been earnings dilutive consistent with our commitment to deliver superior total returns.

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Whilst we remain cautiously optimistic about 2013, market fundamentals have softened.
GPT is meeting these challenges by actively managing our portfolio. This together with fixed rental increases provides a strong base for income growth.
Additional value is being pursued through funds management growth, development and selective asset acquisitions.
In relation to expenses, GPT remains on track to deliver an MER of under 50 basis points.
We will maintain a low weighted average cost of capital. We also seek to further de-risk the business, and we will continue to buy back our securities when it presents value.
Our forecast is that asset values will remain relatively flat.

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I am pleased to advise that we are comfortably on track to deliver our target of at least 5% EPS growth in 2013 despite asset sales in the first half.
We will continue to have a payout ratio of 80% which is 100% of AFFO.
While we are targeting to deliver CPI+1% EPS growth in 2014, that will depend on leasing success in the office portfolio and the general conditions in the retail sector.

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I will conclude by again reminding you that the most important thing the team at GPT can do is allocate capital to deliver the best returns to securityholders.
We seek to be a hyper-efficient organisation that is flexible and opportunistic.
Thank you for your time today. I now invite your questions.

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GPT GROUP Interim / Quarterly Report 2013

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GPT GROUP — Interim / Quarterly Report 2013

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GPT GROUP Interim / Quarterly Report 2013