GPT GROUP - Investor Presentation 2014

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Our strategy is clear and straight forward
Driven by total return
Grow active earnings
Frugal approach and fortress balance sheet
TR 8.5%, EPS 6.1% (ahead of guidance), $1.8bn transactions and developments.
1 performing funds, 7.5% growth, completed $569m capital raise.
Gearing 22.3%, leaving significant capacity, MER 40 bps, debt costs down 50 bps.

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Our total return outcomes are driven by:
Selective asset transactions and developments that preserve and enhance the performance of the portfolio;
Leasing and other asset management strategies that optimise the performance of each asset.
This will mean a focus on earnings and long term value growth.
The 11.2% total return from the funds platform is a good example of enhancing property returns and reinforces the growth opportunities for GPT.
In addition to good capital allocation in buying and selling assets, capital management can create significant value. This includes minimising debt costs and opportunistic security repurchases.
The 2013 results do not include the $1.2 billion asset acquisitions associated with our CPA bid. This will further grow our funds management platform and represents a live example of how we can create value for our securityholders.

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Our approach is very clear
At least 90% of our earnings come from owning core Australian property
This slide sets out the principles that underpin our long term performance
- Total return outcomes drive our decisions – its how we are measured and rewarded
- We are diversified, and we have deep expertise in each of our three sectors
- Capital allocation is key – buying and selling assets at the right time for the right price (not being in Perth office, selling Erina for a premium last year)
- We are agnostic on sector weightings, and correct stock selection is critical
- Development will be used to enhance and grow the portfolio
Targeting to grow active earnings to around 10% should allow GPT to maintain a low cost of capital
This equates to a target of an additional $10bn of Australian FUM over time
Our governance structure for the funds is considered best practice in the sector

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GPT is extremely well positioned with significant opportunities to create value.
We will continue to build a high quality portfolio to deliver low volatility and secure, steady total returns. I believe this is more closely aligned with investors’ long term aspirations and better reflects the characteristics of property as an asset class.
Although we had the best performing funds management platform again this year, the value is yet to be recognised in GPT’s security price particularly given we will significantly grow the platform.
The primary objective of our development business is to preserve and grow value rather than inflate earnings at certain points in the cycle.
GPT has a straight forward business, operating at best practice expense levels. We continue to manage our employee incentive levels down, and performance measurement is based on total return targets
Also, we have investment capacity of $3 billion for asset acquisitions and buy‐backs. This is supported by a proven decision framework to ensure it is used in the right way.
Our strategies are aimed to outperform in the long term. While there is a temptation to use leverage when rates are low, or take more risk to inflate short term EPS, I believe its better to be true to label, to deliver realistic annual earnings growth and a stronger NTA, together producing solid returns every year.

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GPT expects economic growth to remain below long term trend in 2014, however, there is evidence of renewed confidence in Australia’s future.
Retail
Consumer spending has improved supported by confidence in rising house prices, stable interest rates and job security
Regional centres are well placed to benefit from improved conditions
Well priced acquisitions will be limited with development used to enhance value
Office
Leading indicators point to an inflection point in office demand, particularly in Sydney and Melbourne
GPT will continue to de‐risk the portfolio by reducing future lease expiries
Selective acquisitions will provide diversification in our offer to tenants
Logistics
In logistics, the balance in supply and demand drive activity and value
GPT will continue to acquire assets with valuation upside
And the business will benefit from the ongoing development momentum established in 2013
Our target for 2014 is to deliver a total return of greater than 9%, and
We are confident that the current portfolio will deliver an EPS growth of 3% in 2014
Finally, we will payout 100% of AFFO

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I’ll start with the operating performance of the Group for the 2013.
Realised operating income per security, which reflects our underlying earnings, was up 6.1%. This is a strong result, ahead of guidance given at the commencement of the year, reflecting solid contributions from the investment portfolio and each of the operating divisions, the impact of the security buyback, realising overhead savings targets and a lower average cost of debt.
The statutory profit was down 3.9% 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 5.7%, with a distribution for the year of 20.4 cents.
As previously announced we will be moving to FFO as our reported measure of underlying earnings in 2014. A reconciliation between ROI and FFO is provided on this slide and further detail is included in the segment note and Data Pack.

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Focusing now on the segment composition of the result.
Retail Income was lower, primarily as a result of the divestment of the Casuarina and Woden interests in 2012 and the impact of the divestment of Erina Fair and the Homemaker portfolio early in 2013. The retail portfolio had comparable income growth of 2.5% over the period.
Office Income increased with the inclusion of One One One Eagle Street for a full period, with comparable portfolio income growth of 0.7%.
Logistics Income increased with a number of acquisitions and the inclusion of 5 Murray Rose for a full period, with comparable portfolio income growth of 1.0%.
Wholesale Fund distributions were up 9.8%, with an increased investment and strong performance from the funds.
The Management divisions realised a significant increase in profitability, with cost efficiencies achieved and fees increased as funds under management continued to grow along with the further internalisation of property management at a number of assets.
We continue to run the business efficiently achieving an MER of 40 basis points, which is one of the lowest in the sector.
The interest expense was lower as a result of a 50 basis point reduction in the average cost of debt and a lower average debt balance.

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We continue to have a fortress balance sheet.
Net tangible assets increased 6c to $3.79.
Gearing as a proportion of total tangible assets is 22.3%. The Office Fund continues to have low gearing of 11.7% and the Shopping Centre Fund gearing has reduced to 10.7% following the divestment of Carlingford Court and the successful completion of its capital raising.
The weighted average cost of debt fell by 50 basis points to 5.1% and the weighted average term to maturity increased to 5.5 years as a result of the HKD and USPP bond issues.
We are forecasting the weighted average cost of debt to remain steady at 5.1% for 2014.
The weighted average term of interest rate hedging increased from a short 2.4 years to a long 5.9 years on account of a number of hedges being entered into in the first half. The Group is approximately 75% hedged for 5 years.
We recommenced the security buy‐back, acquiring 73.8 million securities and creating $10.2 million of value in 2013 and have acquired a further 11.1 million securities so far in 2014.
We continue to see the buy‐back as an investment benchmark at levels accretive to NTA.
The balance sheet provides us with substantial flexibility to act quickly upon value enhancing opportunities with significant debt capacity across the group to fund asset acquisitions and the security buyback.

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At our strategy day in October we articulated our focus on Total Return as the Group’s primary goal.
We calculate the Group Total Return as the change in NTA plus distributions divided by the opening NTA.
We believe focus on this measure, which encompasses both earnings and capital growth, will enable us to create the most value for securityholders over time.
In 2013 the 6 cents change in NTA plus the 25.5 cents declared in distributions divided by the opening NTA of $3.73 delivers a Total Return of 8.5%.
The reconciling items between the Group Total Return and the Investment Portfolio Total Return are capital management, including leverage, the fair value of derivatives and the buyback along with the contribution from management operations.
I will now hand over to Carmel to talk through the portfolio.

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In September, we outlined our view on the performance of the core sectors and the key principles which we will be adopting in ensuring we build a portfolio which delivers on the 9% group target return. Key strategic drivers for GPT include:
A primary focus on driving value within sectors through superior stock selection rather than a key focus on sector weightings;
Allocating capital with a focus on buying and selling assets at the right time in the cycle;
A focus on maintaining a high quality portfolio;
Adding value through asset management and development skills; and
Securing the best expertise and end to end capability in each sector we operate in.
For 2013, the balance sheet portfolio achieved an unlevered TR of 8%, reflecting a net valuation increase of $92m inclusive of June valuation movements
Office & logistics led sector performance achieving 8.8% and 8.6% for the year.
The retail portfolio achieved a total return of 7.5% marginally lower than the previous 12 months reflecting stable cap rates, more modest income growth and the impact of the write downs at Charlestown and Dandenong.
We have continued to see general downward pressure on cap rates over the year particularly in office and logistics reflecting expectations of improving fundamentals and demand for quality assets.

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The portfolio finished in a strong position with solid income growth and improving retail sales.
General retail conditions improved with the latest ABS retail trade data showing 6 consecutive months of accelerating growth in line with improving household balance sheets and sentiment.
Capital allocation was a key focus with the disposal of $770m of assets improving the quality and metrics of the portfolio with specialty sales productivity now at $9,500 per square metre.
The Shopping Centre fund performed strongly achieving a total return of 9.6% and was the best performing fund in the Mercer IPD retail index.
On the development front, the group completed the Highpoint project and made further progress on the $1.2 billion retail development pipeline.

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Running through the metrics..
Comparable income growth was 2.5% for the year up from 1.5% in June, reflecting improved results at Casaurina, Penrith and Melbourne Central
Speciality sales growth was up from 2012, with growth accelerating over the final half to close at 1.8% for the year.
Looking at sales by category, we continue to see solid results for service and food based retailers whilst majors record mixed results with supermarkets performing well and discount and department stores continuing to show negative sales growth.
Net valuations increased by $42.9m inclusive of the $41.5m write‐down of Charlestown and Dandenong announced earlier this year.
The weighted average cap rate firmed marginally reflecting an improvement in cap rates in the wholesale fund and a firming in Highpoint valuation metrics by 25 basis points.

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In the past 12‐months we have seen a strengthening in the retail market. The top chart shows the accelerating rate of growth in ABS retail sales in the second half of 2013, a trend also seen in the GPT portfolio.
The recovery in retail sales has been and will continue to be driven by the low interest rate environment, recovery in housing market and improvement in business and consumer sentiment. This is most evident in NSW where the recovery in retail sales has been the highest amongst the large states driven by the strong house price growth … this bodes well for GPT given our portfolio weighting to NSW.
The depreciation of the AUD is of particular relevance to retail. The depreciating dollar may negatively impact gross profit margins if higher cost of goods sold are unable to be passed through to consumers. The extent of this impact will be limited by the strength of the sales recovery, the level of hedging and the investment that national retailers have made to operations to improve efficiency over the past 3 years.
On the positive a depreciation of the dollar should lead to a reduction in online shopping and outbound tourism, reducing sales leakages.
The combination of all these factors should be improved sales growth in 2014 across the GPT portfolio.

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Over the last 12 months we have been down weighting assets which no longer fit our quality or return criteria.
The bottom chart shows MAT and population growth, we are now holding a regional portfolio with assets located growing catchments placing us in a strong position to respond to structural and cyclical changes in the retail sector.
Our focus is on maintaining and improving the base portfolio through:
Refreshing assets via acquisition and development opportunites;
Making the right decisions in terms of tenant mix and seeking new revenue sources; and
Divestment of assets which don’t meet are quality criteria and total return expectations.
In line with this there are a number of areas of focus for 2014:
Progress master planning of the retail development pipeline including the next stages of Rouse Hill, Casuarina and Sunshine Plaza;
Complete the repositioning of the Myer tenancy at Dandenong which was commenced in 2013. The remix will significantly improve the retail offer with JB Hi Fi, Daiso, Trade Secret and Aldi committed. On completion in late 2014, the asset will be targeted for divestment.

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The portfolio delivered a solid 8.8% total return despite 2013 being one of the most difficult years in office leasing.
The team successfully executed on over 130,000 sqm of leases reducing future lease expiry in the portfolio from 40% to 24% over the period from 2014 to 2016. We are also pleased to announce today the signing of a further 6,000 sqm in heads of agreements at 111 Eagle Street bringing occupancy to 94%.
In addition, we have continued to see solid performance from the wholesale platform with GWOF placed number 1 in the sector over 1, 3 and 5 years. The fund acquired 8 Exhibition Street and completed the $780m Liberty Place development.
This consistent performance has led to the endorsement of the GWOF shareholders to internalise the management of the portfolio with $3 billion brought in under management in 2013.

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The office portfolio delivered comparable income growth of 0.7% which was down from 2012 numbers, reflecting lower surrender fees and reduced average occupancy in 2013. This reduction in surrender fees is a deliberate strategy to hold tenants in a market where vacancies and incentives have been edging higher.
Occupancy finished the year at 90.6% reflecting the expiry of the Freehills tenancy at MLC in December, which accounted for the majority of this movement over the year.
In a weak office market we continue to success on the leasing front with 135,000 sqm of leasing. Key achievements include the Minter Ellison lease at Governor Macquarie Tower removing 50% of the leasing risk and the announcement of heads of terms today at One One One Eagle Street.
Positive valuations were recorded across the portfolio with a net revaluation of $53.3m with Melbourne Central, Australia Square and GWOF recording strong growth over the year.

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Office fundamentals deteriorated in 2013 with increased vacancy creating an environment of generally flat face rents, increasing incentives, and declining effective rents.
We continue to believe that 2014 will be a stabilisation point in the market with leading economic indicators pointing to a recovery in business conditions, and positive signs that net absorption may have reached an inflection point. This recovery will be led by Sydney and Melbourne which have not experienced the supply and demand shocks that Brisbane and Perth have.
Looking at the right hand charts. We can see that in Melbourne and Sydney, sub lease vacancy has fallen indicating that business sentiment is improving. In addition, total vacancy has started to shown signs of stabilisation in the Sydney market
We believe that the office leasing environment and rental growth will remain reasonably weak in 2014, however, steadily improve. Sydney and Melbourne which make up the majority of GPTs office exposure, will be the first to recover.

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For the past 2 years there are a number of areas where we have focussed our strategy.
A key area has been the de‐risking of the expiry profile. Since 2011 we have significantly reduced this exposure with expiry averaging 8% pa to 2016, one of the lowest in the peer group.
This has driven solid returns with the portfolio achieving a rolling 3 year total return of 8.5% in a weak market.
We have successfully executed on the internalisation strategy, building expertise, and end to end capability in office. The platform now manages $6.4 billion and is the second largest in the country.
Demand for office space continues to be influenced by a corporate requirement to reduce cost and improve efficiency. This theme is reflected in recent leasing activity in the portfolio with major leasing deals showing a 20% reduction in space requirements and increased demand for accommodation at reasonable cost.
The balance sheet will continue to look to build the portfolio to improve diversity by price point, tenant type and sub market to meet this requirement.

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We are extremely pleased to have delivered on our initial logistics growth strategy. As at December we have met our initial growth targets, we have built a strong logistics capability and delivered a strong total return.
Since the start of 2012, the portfolio has grown from $832 million to $1.2 billion today and with completion of committed development projects will increase to $1.43 billion.
A total of $107 million of assets were acquired and a further $377 million was committed in development product with the announcement today of 82,000 sqm of prelease activity. On completion of these developments, the portfolio WALE will move to over 8 years and 45% of the existing land banks will be activated.

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The total return for the year was 8.6% reflecting acquisition costs associated with the Yennora and Yatala transactions. Excluding these costs, the total return would have been above 9%.
Comparable income growth was 1.0% reflecting reduced average occupancy across the portfolio with the major impact being the vacation of Mars at Somerton in October.
Over the year, we leased a total of 156,000 sqm with 72,000 sqm being in the investment portfolio whilst a further 82,000 sqm was secured in pre‐lease activity. Key pre‐lease activity includes the TNT, Rand and RRM deals at Erskine Park, whilst the renewal of API our fourth largest tenant in the portfolio was also secured.
A marginal increase in net valuation was recorded over the period reflecting the write off of acquisition costs.

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The east coast Industrial markets remain mostly in balance with moderate levels of supply and average levels, although patchy, demand.
Demand has been led by transport and storage occupiers with most activity in Western Sydney and
Melbourne’s West.
The slight reduction in gross take up in the latter part of the 2013 and increase in vacancy has resulted
in incentives increasing, specifically in the Melbourne market
Investor demand for prime assets is projected to remain strong leading to further yield compression.
This has had a flow on affect to land values with strong demand in the outer west Sydney market.
Looking forward we expect tenant demand will benefit from the current recovery in the housing market and consumer spending. However, market fundamentals still suggest moderate rental growth over the short‐term.

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Over the last 2 years we have focused on establishing and growing a strong logistics platform. This was critical to performance and in line with our strategy to have appropriate end to end expertise in the sectors we operate in.
We now have a fully integrated logistics development division with a current committed pipeline of $377m due for delivery over 2014 to 2015. The ability to generate development product at attractive yields in a competitive market is a key focus and in addition enables us to have flexibility to provide opportunity to the funds platform.
On the investment portfolio side we have acquired $107m of assets in 2013 and continue to actively seek opportunities within the logistics space .
The focus for 2014 will continue to be the successful delivery of the development pipeline, extension of the existing investment portfolio and actively looking at divestment and appropriate acquisitions which meet our quality criteria.

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We have made good progress on our objective of growing FUM by $10 billion.
We acquired a seed asset for a Metropolitan office fund and continue to target the launch of this fund, and a logistics fund in 2014.
We have two developments underway which will further grow our existing funds in addition to the $1.2 billion of acquisitions agreements in place in relation to our CPA bid. The additional $1.2 billion will further increase our FUM by 17%.
We have deliberately not assigned a deadline to achieve the Fund targets. We will buy the right assets at the right price, and launch new funds when the market permits.

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We believe that a quality portfolio with simplicity and transparency will deliver the best returns over time.
We will continue to be opportunistic with our capital, and make sure our investment capacity is used in the right way.

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GPT GROUP Investor Presentation 2014

65009_rns_2014-02-12_79b1d2eb-5c91-43eb-be12-d427a542a688.pdf

1 performing funds, 7.5% growth, completed $569m capital raise.

AI assistant

GPT GROUP — Investor Presentation 2014

65009_rns_2014-02-12_79b1d2eb-5c91-43eb-be12-d427a542a688.pdf

1 performing funds, 7.5% growth, completed $569m capital raise.

More from GPT GROUP

GPT GROUP Investor Presentation 2014