GPT GROUP - Investor Presentation 2012

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THE GPT GROUP

Speaker’s notes from 2011 Annual Result presentation

20 February 2012

Michael Cameron, CEO and Managing Director

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Good morning and welcome to the GPT 2011 Results Presentation.
Today I will talk about our strategy and the performance of the business.
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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In 2011, the team at GPT has again delivered on our promises.
The operating performance for the year was strong.
We were very active in managing capital, and
GPT is now well positioned for growth in 2012 and beyond

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The result for 2011 highlights both the stability in our earnings and the embedded growth in our portfolio of assets.
Operating profit of $438.8m is up 7% on 2010 with a statutory result of $246.2m.
EPS growth was 8.1% and DPS growth was 9.2%.
Although economic conditions were challenging, comparable income growth was a steady 3.6%, and
We continued to grow the portfolio with the commencement of two significant development projects.

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Our focus has been on delivering secure, reliable returns for investors.
EPS growth of 8.1% exceeded our target of CPI + 1% and the guidance we provided in August.
Total returns were mainly impacted by mark to market derivative movements.
The graph on the right shows a solid TSR result of 10.5%, compared with negative 1.5% for the sector, and negative 10.5% for the ASX200.

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We were again very active with capital initiatives.
The average cost of debt reduced by 80bps in 2011 and we remain conservatively geared at 22.9%, with an average debt term of 5.3 years.
We activated a security buy back with $140 million of securities bought back to date.
At the start of the year we committed to reducing our interest in the wholesale funds. The completion of that initiative raised $517m of cash.

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A major factor that has contributed to generating stable returns has been the quality of the portfolio.
With 95% of the retail assets being regional centres and the office portfolio being 100% prime, it’s no surprise our average occupancy across the total portfolio over the last 5 years was 98.7%.
Quality assets and high occupancy levels provided stable income growth across the total portfolio.

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We continue to optimise the business to achieve our targets through:
Structured rent increases
Tight expense disciplines, and
Active capital and portfolio management
In addition, to accelerate our performance we are now well positioned to:
Deliver stronger returns from development
Grow our Funds Management business, and
Continue to create new revenue sources
We also have the capacity to acquire accretive assets or portfolios if they meet our strategic and return criteria.
In line with this strategy, I am pleased to announce today that we have exchanged contracts to acquire an industrial asset in Port Melbourne for $61 million. The Citiport acquisition is a 28,000sqm industrial park, with both office and warehouse facilities, and is a good example of the types of assets we are targeting.
I will outline GPT’s growth strategy in more detail toward the end of this presentation.
Michael will now take you through the financials.

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I’ll start with the operating performance of the Group for 2011.
Realised Operating Income per security, which reflects our underlying operational earnings, was up 8.1% over 2010 – a strong result, ahead of the guidance we gave at the half year result, and reflecting solid contributions from each of the operating divisions as well as the earnings per security benefit generated by the security buy-back.
The statutory profit of $246.2m includes non-cash movements in the value of our properties and our interest rate hedges, which did not impact distributions. A solid upward revaluation across the three core portfolios has been more than offset by two significant negative movements.
The currency movement on the US Seniors Housing Portfolio, which we sold in March, was transferred from a balance sheet reserve to our statutory profit. The movement had already been reflected in the Group’s NTA.
A substantial reduction in interest rates through the course of the year, driven principally by a deterioration in European financial markets, has resulted in a $150m reduction in the value of our derivative positions through the course of the year.

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Turning now to the composition of the Operating Result.
Retail income was up strongly, benefitting from the completion in March of the expansion of Charlestown Square. Comparable income (on a like for like basis) was up a solid 3.6% as a result of strong growth at Melbourne Central, Rouse Hill Town Centre and Westfield Penrith.
Office also showed a good result with comparable income growth of 4% and strong performance from the MLC Centre and the Melbourne Central tower.
Income was lower from Funds Management as a result of the $301m sell-down of GPT’s interests in the funds through the course of 2011 but distributions per unit were up 7.3% as a result of strong income growth in the Office fund.
Income was also lower from the non-core businesses due to the sales, completed in the first half, of the US Seniors Housing portfolio and Ayers Rock Resort. The only remaining non-core assets are small interests in two closed-end European funds valued at $9m.
Interest expense was lower as result of a lower debt balance as the asset sale proceeds were received, but also because of further progress on lowering the average cost of debt.

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We’ve continued to focus on keeping as big a gap as we can between our operating income and our expense growth (the ‘jaws’) – which gives us a positive leverage effect on our earnings.
In 2011 we focussed on making two of our key business processes more efficient – our procurement and our forecasting. Some benefits flowed through in 2011 but full year benefits will be realised in 2012.
This year we’ll focus on our retail leasing process where there is significant scope to simplify and streamline.

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The Balance Sheet remains in great shape, with gearing as a proportion of total tangible assets at 22.9%, down 2% on 2010 as a result of the completion of the sale of the US Seniors Housing portfolio, the sell-down of GPT’s interests in our wholesale funds and the receipt of the first instalment of the Ayers Rock Resort proceeds, which more than offset the expenditure on our development projects and the buy back.
Interest cover is up to 4.2x as a result of the lower gearing level and the growth in earnings.
NTA is down 1¢ to $3.59, impacted largely by the mark to market movement in the value of our interest rate derivatives.

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In terms of Capital Management, we’ve had three key areas of focus through the course of 2011 – getting our cost of debt down, continuing to further extend our debt maturity profile and buying back securities where we saw good value.
And I’m pleased to say we’ve made good progress on each of these.
We’ve focussed heavily on lowering our cost of debt because a cost of debt above the yield on our assets is an earnings drag and was one of the major contributors to the gap between the share price and our NTA.
We’ve been successful in reducing our average cost of debt by 80bps in 2011 to 6.6% and we’re targeting a further 40bps reduction in 2012 to 6.2%.
And we’ve done that through very active treasury management.
We’ve kept liquidity, that is, available but undrawn lines, tight; we’ve cancelled expensive loans and replaced with loans on lower margins with longer tenor; we’ve renegotiated downward margins on existing loans and we’ve selectively terminated higher rate hedges as asset sale proceeds have been received, allowing us to remain well hedged but at a lower average hedged interest rate.
At 6.2%, our target for 2012, the average cost of debt will be below our asset yield, so the debt on our balance sheet is now enhancing earnings rather than being a drag on earnings.

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The other key area of focus for us, in terms of capital management, has been flattening and extending our maturity profile which helps us achieve attractive borrowing margins and means we can keep our liquidity levels low, reducing cost.
The 7-year bond issue we completed in January increased our weighted average term to maturity to 5.3 years and further diversified our sources of funding.

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We’ve completed to date $140m of our security buyback at an average price of $3.04, a 15% discount to NTA, providing a $25.8m uplift to NTA.
The buyback has been funded with the proceeds of assets that were sold at an average 15% premium to book value.
We continue to believe that buying our stock at a discount, generating earnings accretion and an uplift to NTA is a very compelling use of our capital.

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We’ve talked before about why we’re trading at a discount to NTA.
It was clear that there were certain impediments that were holding back our earnings and we’ve been very focussed on removing those earnings drags.
The graph on this page shows the Group’s yield on NTA (that is the Realised Operating Income over our NTA) from 2009 to 2011. You can see that, as a result of addressing those earnings drags, the yield has increased significantly – due to the work we’ve done on lowering our cost of debt, reducing our stakes in our wholesale funds, keeping our cost growth low and selling some of our nonincome producing assets.
We will continue to focus on improving this measure as the principal method of closing the gap between our security price and our NTA. Further improvement is expected in 2012 through the reduction in our average cost of debt, continued progress on our security buyback and advancing the sale of our non-income producing assets.

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Of all of the information reported, the most important measure is the delivery of strong income growth each year.
Comparable income growth of 3.6% during a challenging year demonstrates our ability to work our portfolio hard, and highlights the lack of volatility in the business.
This is not a time to be complacent. We are continually scenario planning for extreme positions in our sectors to help us adapt and de-risk for the future.

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Despite subdued retail conditions in 2011, the retail portfolio delivered comparable income growth of 3.6% for the year.
There was an improvement in specialty sales growth but this fell short of our expectations.
Sales per square metre improved to $8,958 and occupancy costs were 17.6%.
Arrears increased to 0.5% but remain low.

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We think 2012 will be a year of flat retail sales growth, with releasing spreads flat or slightly negative in some cases. We are confident occupancy will remain high.
GPT’s retail income will be relatively resilient, as 86% of the specialties are subject to an average 4.5% increase in rents.
We understand the sensitivities of the business in the short term to a potential continued retail slowdown.
Our analysis shows that, hypothetically, if rents were 5% lower on stores to be re-leased during this year, which is more negative than we anticipate, the impact would be a reduction of $2.2 million in net income or 0.12c on EPS.
Sensitivity analysis on vacancies shows that a 0.4% change for a full 12 months would have a $3 million impact on net income.
As you can see, changes like these would have a relatively low impact on this year’s earnings, so we have a high level of confidence around delivering our targets.

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In 2011, we achieved a 2% positive leasing spread despite the Red Group and Colorado store closures.
The leasing team actively monitor retailer performance, which enables them to anticipate and pre-empt problems and opportunities.
A good example of the value of an active re-mixing strategy is the releasing of the Borders site at Rouse Hill Town Centre. The large format store was leased to a combination of businesses, delivering an actual increase in total rent.
We continue to evolve our retail business plans in response to the changing market environment and we invest time into exploring the future structure of the sector.

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In relation to our Office portfolio, we said last year the increase in average occupancy would result in stronger income growth in 2011.
We were pleased to deliver 4% growth.
Our NABERS energy rating (including green power) of 5 stars remains the highest in the sector.

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57% of our office portfolio is premium grade - the highest proportion in the sector.
This has helped us maintain a higher occupancy level than the industry, and allowed us to have fixed structural rent increases of 4% across 83% of the portfolio.
Leasing activity during the year was strong, with re-leasing spreads of around 6%.

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In 2011 there was positive net absorption in major CBD office markets and prime assets are continuing to perform well.
With extensive reporting of potential financial services job cuts, there has been some concern about future office demand and we have looked closely at the impact of changes on future earnings.
While GPT has exposure to the major banks in all three major cities, the impact on occupancy is expected to be limited. GPT has a low lease expiry profile of 8% in 2012 and supply continues to be limited in our key markets.

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All of the key operating metrics for our industrial portfolio remain steady.
78% of the portfolio is subject to fixed structured rent increases of 3.3% and only 9% of the leases expire during 2012.
In 2011, we saw flat re-leasing spreads across the industrial portfolio.

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One of the lead indicators we use in our industrial business is container throughput.
With the exception of 2009, growth has been positive in the major capital cities each year.
With limited supply and little speculative development, average rents are likely to increase over the next few years.
Of the two vacancies we had at December 2011, one is now leased with good interest on the second.

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Across GPT, we use a sophisticated capital allocation framework to actively manage the portfolio.
Our portfolio strategy is straightforward, investing in high quality Australian Retail, Office and Industrial assets.
In terms of sector weightings, one of the actions we have to achieve our internal targets is to grow the Industrial portfolio.
The acquisition of the Citiport industrial asset, mentioned earlier, demonstrates an initial step towards achieving this strategy.

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Our Funds Management business continues to perform well.
Gearing of 12.9% and 11.3% remains very low, providing significant capacity.
Three year returns were above the sector average by 170bps in the Shopping Centre Fund and 300bps in the Office Fund.
In preparation for our expansion of this business from its $5.5bn base, we have appointed Michelle Tierney as Fund Manager for the GWSCF, and Hamish Roth to a new position focused on growth. Martin Richie remains Fund Manager for GWOF.

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During 2011 we sold $301m of GPT’s interests in the funds taking the total sold to $517m.
Since June 2010, the total capital raised in the funds was $1.1bn.
Importantly, the new issue and the GPT sell-down were all done at NTA, demonstrating the demand and liquidity of the funds.
Nick Harris and his team continue to deliver outstanding performance.

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You will recall we have previously explained the financial benefits of reducing GPT’s interest in the funds.
These two charts of the actual before and after position show the up lift of 80 basis points achieved.
GPT is now at its target holding level and the funds are in excellent shape to expand.

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Development is a core function for GPT:
In 2011, GPT commenced two new developments at Highpoint and Wollongong Central, in addition to projects already underway.
I am pleased to announce that we have entered into a Heads of Agreement to lease 100% of 5 Murray Rose to the Lion Group for a term of 12 years. This is ahead of our target and reinforces strong demand for Sydney Olympic Park.
GPT continues to maintain a large development pipeline with new development opportunities being actively investigated.
GPT and its funds are ideally placed to undertake further developments as $2.3bn of the $3.2bn pipeline could be funded from existing debt capacity. The wholesale funds also have demonstrated strong equity raising capability.

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We currently have $1.3bn of developments underway.
Completion dates and target yields are shown in this table.
New developments are subject to a strict criteria including the need to be accretive and meet minimum return targets.

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111 Eagle Street is on schedule for completion over the next couple of months.
53% of the floor space is committed with leases averaging $809pm[2 ] and 25% incentives.
The negative impact on earnings in 2012 is expected to be around $7m being the cost of the interest on our share of the project, partially offset by net income from tenants as they progressively occupy their new space.

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Construction is well underway with the re-development of Highpoint. Mark Pheely and the team have made great progress.
For GPT, the target yield on this project is 10%.
The specialty leasing program commenced in September last year, with completion of the expansion expected to be in early 2013.
We have already leased 58% of the new space.

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Our sustainability initiatives contribute to the bottom line by reducing costs, and allowing us to attract and retain good tenants.
Our Social Investment into our assets keeps them connected and attractive to the communities where they exist.
Our activities in these areas are being noticed around the world, and the benefits are now tangible.

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Our priorities for this year build on our success in 2011.
We have four main priorities:
We will continue to optimise every part of our core business
and actively manage the portfolio.
Our team is focused on high performance and we are investing in building an even stronger culture within the organisation.
A key focus for the group is to build sustainable growth in the business.

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We have four key growth platforms.
In our development team, as well as preserving and enhancing our existing portfolio, we are looking to expand the model with a more commercial approach that leverages our partnerships.
Anthony McNulty has hired John Thomas to help accelerate the contribution this business makes.
We will grow the funds management business through expanding the two existing funds and investigating the potential for new funds. I have already mentioned the appointment of Hamish Roth who will focus on growth opportunities.
An example of new revenue sources is the internalisation of the property management business which will initially add around $1 million to GPT’s annual earnings without any capital investment required. Also we have a new idea called GPT Energy which we will pilot in 2012.

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Following a significant realignment of the structure of our business with our strategy, GPT’s Leadership Team is well equipped to deliver on our promise of superior performance.
One recent addition to the Leadership Team is Matt Faddy who now leads the Property and Asset Management business.
We continue to invest in our senior team, with a focus on leadership, culture and the internalisation of external knowledge and thinking.
Activities have included Harvard Business School, and other leadership development such as coaching.
I look forward to talking about other exciting initiatives planned for 2012.

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The outlook for the year ahead includes a combination of Headwinds and Tailwinds.
In the short term, it’s difficult to see a significant improvement in global economic conditions, domestic confidence, and spending levels.
At some point there is the potential for a fast domestic turnaround, and there remains a limited supply pipeline of quality assets.
We have de-risked the portfolio in anticipation of continued slow sales growth and an environment of inevitable job cuts in parts of the work force.

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Our portfolio income will be helped by structured rental increases and high occupancy, however the leasing up impact of 111 Eagle Street will occur in 2012.
Our focus on growth to deliver a step change to earnings will continue as we adapt to changing trends.
We will be disciplined with expense and capital management which will continue to support earnings.
Lastly if conditions in 2012 are similar to 2011, even though recent transactions support robust values, valuations are likely to remain relatively flat.

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As we have demonstrated, our business is defensive in nature and does not experience the earnings volatility of more risky business models.
We are again targeting EPS growth of at least CPI + 1% for 2012 with a payout ratio of no less than 80% of ROI.

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In 2011 we have delivered on our promises:
A strong operating performance
Active capital management, and
We are well positioned to deliver growth in 2012 and beyond.
Thank you, I now invite your questions.

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GPT GROUP Investor Presentation 2012

65009_rns_2012-02-19_1b359c0a-58f4-4b85-addf-f4436dacee58.pdf

THE GPT GROUP

Speaker’s notes from 2011 Annual Result presentation

20 February 2012

AI assistant

GPT GROUP — Investor Presentation 2012

65009_rns_2012-02-19_1b359c0a-58f4-4b85-addf-f4436dacee58.pdf

THE GPT GROUP

Speaker’s notes from 2011 Annual Result presentation

20 February 2012

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GPT GROUP Investor Presentation 2012