GPT GROUP — Interim / Quarterly Report 2014

Aug 11, 2014

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Good morning everyone.

It is my pleasure to present the GPT Group Interim Results for 2014.

The first half has been an active period, with strong outcomes achieved for our securityholders.

This first slide covers progress against the three pillars of our strategy.

• EPS growth was 4.5%; and

• Total Return was 8.4% on a rolling 12 month basis.

• It is very pleasing to see a TSR of 16% which compares favourably to the AREIT sector return of 12.7% over the half [based on the S&P/ASX 200 AREIT Accum. Index].

• The Group has completed $1.1 billion of acquisitions since January, including new product for our logistics development pipeline.

• In Funds Management we have achieved 18% growth in assets, and the business has contributed a 9.7% return to GPT, being a combination of distributions and management fees. Following recent successful acquisitions by the office and retail funds, we can announce that we have commenced capital raisings for both funds.

• We have maintained our fortress balance sheet, with a cost of debt for the six months of 4.8%. This is forecast to be 5.0% for the full year. Gearing at the end of the period was 24.8% which is at the bottom of our stated range.

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• In February, I said that I expected economic growth to be below long term trend. While there has been some improvement in the first half, there are unlikely to be any material changes during the remainder of the year.

• In our retail business:

• Consumer spending improved, supported by confidence in rising house prices, stable interest rates and job security;

• Acquisition opportunities are scarce, with pricing remaining firm;

• Dominant assets in strong catchments are expected to outperform.

• In our office business:

• Leading indicators such as ANZ Job Ads and NAB Business Confidence, have improved; and

• Our leasing team has continued to actively manage our expiry profile.

• In our logistics business:

• • Prices for available assets are very competitive;

• We will continue to acquire assets with valuation upside. However, we see better value in creating our own product, following the development momentum established last year.

• Importantly, we are on track to deliver EPS growth of at least 3% in 2014.

• And we are also on track to meet our Total Return target of greater than 9% for the full year.

• I will now hand over to Mark to discuss the financial result.

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Good morning. I’ll start with the operating performance of the Group for the first half 2014.

• The statutory profit for the half was $240.6 million, which was down 6.4% from the prior corresponding period. This was driven by the impact of asset sales completed in 2013, the $27.4 million negative mark to market movement on our derivatives, offset by the $30.8 million uplift in the value of the investment portfolio.

• As previously announced, we have moved to Funds From Operations as our reported measure of underlying earnings in 2014.

• FFO per security was up 4.5% on June 2013. This result was driven by a solid contribution from the investment portfolio, strong growth in the Funds Management and Development Divisions, along with a lower average cost of debt and the impact of the buyback.

• The distribution of 10.5 cents declared in June is up 4.0% on the prior comparable period.

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Focusing now on the segment composition of the result.

• Retail income was down $16 million, primarily as a result of the sale of the Erina and Fortitude Valley assets completed last year. The retail portfolio had solid comparable income growth of 2.6% over the period.

• Office income was $5.3 million lower, with comparable portfolio income growth down 3.1%, reflecting the impact of higher vacancy in the portfolio.

• Logistics income grew strongly, up $6 million following recent acquisitions and development completions. Comparable portfolio income growth was flat at 0.6%, reflecting higher average vacancy this period.

• Wholesale Fund distributions were up $2.9 million, with an increased investment by GPT and strong performance from the Funds.

• In addition to the Investment Management result, the business delivered an increased contribution from rolling out the development pipeline and the growth in Funds Management fees.

• As in prior periods, we continue to run the business efficiently with an MER of 40 basis points, which is one of the lowest in the sector.

• Net interest expense was lower as a result of a 40 basis point decline in the average cost of debt in the first half, offset in part by a higher average debt balance.

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Importantly the Group remains in a very strong capital position.

• Net tangible assets increased 3 cents from December to $3.82.

• Gearing, as a proportion of total tangible assets, is 24.8%. Whilst gearing in the Wholesale Funds has increased as a result of the recent successful transactions, the upcoming capital raisings for each fund will reduce look-through gearing and increase capacity.

• During the half year Standard & Poor’s moved GPT’s A- credit rating from a ‘stable’ to a ‘positive’ outlook, reflecting the strength in the balance sheet.

• The weighted average term to maturity is 6 years, including the further USD$175 million US Private Placement for 15 years issued in the first half at an all in margin of 144 basis points over BBSW.

• The weighted average cost of debt has declined by 30 basis points from December to 4.8% and we are now forecasting a weighted average cost of debt of 5.0% for the full year, down marginally from our forecast of 5.1% at the start of the year which is a great outcome considering the increased tenor achieved.

• The buyback had limited activity in the period in light of the improvement in security price experienced as the year progressed. During the period the Group acquired 11.4 million securities for total consideration of $41 million, creating an incremental $2.8 million of value for securityholders.

• Disciplined capital management ensures that the balance sheet continues to provides us with substantial flexibility to execute on value enhancing opportunities as they arise. At June 30, the Group had investment capacity of over $1.6 billion.

• I will now hand over to Carmel to discuss the investment portfolio.

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Thank you Mark.

Before I move into the detail of the individual sectors, I would like to touch on the progress we have made and how we are tracking against our priorities.

• Over the past two years, our focus has been on rationalising the balance sheet to ensure we are invested in the right assets, and selling assets that have delivered their maximum long term value to GPT. At the same time we have grown. Together with the $1.1 billion of acquisitions for the first half, we have acquired and developed over $3 billion in assets across the balance sheet and funds platform, increasing Funds Management earnings for the Group.

• At a sector level, the focus has been around active asset management and strengthening income.

• In office, we have leased ~60% of the portfolio over the last four years – a notable achievement at a time of weaker market fundamentals. There is more work to be done, and a key part of that is delivering on our vision and plans for the MLC Centre, which I will discuss in more detail.

• We are now seeing a recovery in the retail sector with an improvement in consumer sentiment and household wealth leading to positive retail sales growth across the portfolio. We are well placed, owning 16 Centres located in strong catchments. A solid retail base from which to add value.

• Two years ago we stated our intention to grow our presence in logistics. At this time logistics made up 11% of the portfolio. Today, logistics makes up 15% of the portfolio with circa $300 million acquired and a further $330 million of developments underway. We have now built a successful development business from which to continue our push into this sector at a time when competition for prime assets is rising.

• Looking at returns, we achieved a total portfolio return of 8% for the 12 months to June, driven by performance in the retail and logistics portfolios. These returns were offset by a weaker office result, following a reduction in the MLC Centre valuation. For the full year, we expect a stronger outcome based on a continuation of current capital market conditions and an improvement in fundamentals.

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This slide details our priorities as we outlined them in our financial year 2013 results briefing:

• In Retail

• Staying focused on those centres which dominate their catchment is key. If we continue to see retail sales recovering, we expect this will provide us the opportunity to unlock additional value at a number of our existing centres. We have progressed our development pipeline over the first half and we will continue to work on masterplanning.

• The other focus is identifying untapped potential across the sectors, such as student accommodation and residential value. This is evident in the work underway at Casuarina Square and Sydney Olympic Park. I will touch on this in more detail shortly.

• Work continues on the repositioning of Dandenong. We have now pre-leased all the specialty tenancies as part of our works on the old Myer space. However there is still work to be done on the expiry profile of this asset and we remain focused on delivering the right outcomes.

• In Office

• We continue to look for quality assets that will add to or enhance our mix. This includes trading out of assets where we think we can extract value and recycling capital into better positioned assets. 818 Bourke Street is an example of this activity.

• In Logistics

• The key for GPT continues to be growing our development pipeline in the right way, to deliver future growth to the business.

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Turning to retail.

• Strengthening sentiment, prior to the Federal Budget in May, has underpinned an improvement in retail fundamentals. This is reflected in improved sales across the portfolio with the Group experiencing positive specialty sales growth for 11 of the past 12 months. This recovery will have a positive impact on retail metrics, however we do not expect this to translate to a significant improvement in leasing spreads in the short term.

• Comparable income grew by 2.6%, compared to 1.5% in June 2013. At an asset level, Melbourne Central, Highpoint and Sunshine Plaza all delivered strong contributions. Lease duration on new deals averaged 4.5 years while an average of 4.8% annual fixed reviews were achieved on all new deals.

• Occupancy remains high with 35 vacancies across 3,300 shops. Holdovers remain stable at 120 shops reflecting 2.9% of base rent.

• Specialty retail sales grew by 2.7% over the 12 months to June, with the first half of this year seeing an acceleration to 3.0%. Over the same period, occupancy costs have reduced and productivity has increased.

• Centre sales growth remained modest, up 0.5% for the year. This was largely driven by some of the Major retailers reporting 4 weeks of sales in June compared with 5 weeks last year, and the poor performance of discount department stores, which showed negative sales growth of 5.8%.

• The retail business achieved a total portfolio return of 8.1%, with positive valuation contributions from Charlestown Square, Sunshine Plaza and Penrith, offset by negative movements in GPT’s equity interest in the Shopping Centre Fund.

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• The team has continued to work on unlocking value from the $1.1 billion retail development pipeline

• There are a number of key areas of focus in 2014:

• The Wollongong Central development for the Shopping Centre Fund commenced in 2012 and is due for completion later this year. We expect the project will be fully leased on opening with 66 of the 74 specialty shops committed to date, together with Coles, Target, and JB Hi Fi.

• The 300 bed student accommodation project at Casuarina leased to Unilodge is underway. Similar mixed use opportunities are being investigated as part of the masterplanning process across the portfolio to transition retail assets from pure shopping centres into major activity or town centres.

• Other examples include the rooftop at Melbourne Central where we are investigating opportunities for both student accommodation and a hotel, and Sydney Olympic Park town centre, which has the opportunity to develop over 170,000 sqm of mixed use.

• The Rouse Hill Stage 2 project planning is underway with the announcement of the North West railway link and commencement of works. This provides a significant opportunity for the centre, which has delivered specialty sales growth over the last 4 years of 23% with 2014 showing 8.5% growth.

• Masterplanning works are also progressing for the next stages of Casuarina Square and Sunshine Plaza where we have Myer and David Jones AFL’s signed.

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Turning to office.

• We have been in a period of repositioning the portfolio. At the same time in our core markets of Sydney and Melbourne, we are seeing lead indicators continuing to recover. This is backed up by an increase in enquiry levels over the first half.

• Four years ago we faced 60% of the portfolio expiring to the end of 2014 with the 2014 year having a very high 26% expiry.

• After leasing over 450,000 sqm over this period, we have now strengthened the portfolio and positioned it for growth. Our focus on the portfolio has resulted in:

• An improved WALE to 6.3 years;

• An occupancy of 91.7%; and

• A low and flat expiry profile into the future averaging 8% over the next 4 years.

• For the first half we have leased a total of 105,000 sqm of space inclusive of signed leases and heads of agreement.

• As a result of the high expiry this year, as expected our like for like income growth for the half was negative 3.1%, predominantly due to the vacancy at MLC Centre. Excluding the MLC Centre, our like for like would be positive 1.5% for the half.

• The portfolio achieved a total return of 7.6% for the year to June. A revaluation uplift of $4.3 million was recorded for the half, impacted by a $35 million write down at MLC Centre. This is due to an additional allowance as a result of increased scope on the façade.

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• The key focus for our office team is the releasing and repositioning of the MLC Centre. We have leased and renewed over 10,000 sqm this year, including two floors of the ex-Freehills space. There are a number of work streams underway and I will touch on each of these briefly.

• The first area is the façade remediation which commenced in 2012. We are now 30% of the way through the north elevation. Through this work we are achieving great results with the facade undergoing a complete refurbishment. Since commencement, the volume of work has increased and as a result we have extended the scope leading to additional façade costs of $26 million (50%). This new cost has been adopted in the valuation as at June and is the primary reason for the $35 million reduction in valuation.

• The second stage is the food court and End-of-Trip facilities which commenced in July. The cost of this upgrade is $7.5 million and will enable the food court to leverage the significant increase in office population along Martin Place.

• The tower repositioning is underway with the mid-rise floors progressively undergoing extensive refurbishment, and we now have three display floors available. On completion of this refurbishment, the majority of the building services will be of a Premium Grade standard.

• A larger scale retail redevelopment is in planning stage with DA lodgement expected in Q4. This will involve a new luxury retail offering along King and Castlereagh Streets and expanded food and beverage offering overlooking the plaza and a new leading theatre operator. Additional tower foyer works will be completed with a new entry from Castlereagh Street. The scheme is targeting a 10% development margin.

• This redevelopment, in addition to the façade and office tower works will ensure the asset becomes one of the most sought after precincts in Sydney CBD.

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• Our logistics and business parks business has experienced strong growth with the portfolio now at over $1.3 billion, and on completion of existing development product will total $1.5 billion, representing 15% of the portfolio.

• Our initial growth via acquisitions is now being replaced by development, as competition increases in the investment market and fewer quality assets are offered for sale.

• We remain focused on ensuring we enhance value in our portfolio with active strategies around rezoning, reinvesting in assets and releasing. The portfolio is performing well with income up 16% year on year due to completion of the Toll NQX facility at Berrinba in Brisbane, and completion of acquisitions in the second half of 2013.

• Like for like for the half is up 0.6% impacted mostly by the Mars vacancy at Somerton. Excluding Mars, the like for like would be 3.0%.

• Occupancy has remained stable at 95.3% with nearly all vacancy held in our Melbourne assets, reflecting the weak market enquiry levels.

• The portfolio WALE remains a strong 5.5 years post the inclusion of the Toll development with a 15 year lease term.

• The portfolio’s cap rate has reduced 16 basis points to 8.17%. This cap rate tightening is reflective of the broader market where we have continued to see strong demand for logistics.

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• We continue to focus on growing our industrial portfolio with development deliveries now replacing acquisitions. Over the last 12 months we have delivered a development margin of circa 10%.

• Our development pipeline is now greater than $650 million of which $300 million is currently under construction and over $350 million of product to come from current land holdings.

• During the half we successfully completed the Toll NQX development at Karawatha, with Toll now operating one of the best logistics facilities in the country.

• Development under construction includes three projects at Erskine Park, with an end value of $248 million due for completion in the first half of 2015, and 3 Murray Rose at Sydney Olympic Park with an end value of $78 million fully committed to Samsung. On completion of these projects our portfolio will increase to $1.5 billion and have a WALE of greater than 8 years.

• 3 Murray Rose is the second of three commercial developments within GPTs Murray Rose Precinct and will deliver a development margin of over 8%.

• Our future pipeline has been enhanced with the acquisition of the 58 hectare site at Wacol, a prime industrial location in Brisbane’s south east at the intersection of the Ipswich and Centennary Motorways. This site will be developed over a 5-6 year period with our joint venture partners, delivering an estimated $350 million in product.

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• The first half has been successful for the Funds Management division, with another strong contribution to Group results. It has delivered a 9.7% return to GPT over the last 12 months.

• Profitability and overall contribution to Group earnings will grow further following the successful completion of several transactions

• The funds have now commenced capital raisings, with a total target of $650 million.

• Nick Harris and the team continue to work on new fund opportunities and we expect to launch the Metropolitan Office Fund before the end of the year. An industrial fund launch continues to be targeted by the Group, but is subject to the purchase of suitable assets from the market.

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In conclusion

• Our portfolio has delivered solid investment returns, and we are working hard to ensure it is well positioned for the future.

• Logistics development activity has contributed meaningful value growth to the Group.

• The Funds Management business has continued to expand.

• And we have maintained a fortress balance sheet which will enable us to take advantage of future opportunities should they arise.

• We are on track to deliver EPS growth of at least 3%, and achieve our Total Return target this year.

In closing, I would like to thank you for joining us today, and I now invite your questions.

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