GPT GROUP — Investor Presentation 2015

Feb 22, 2015

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Good morning, and welcome to the GPT Group Annual Results for 2014. In recognition of GPT’s commitment to a Reconciliation Action Plan, I would like to acknowledge and pay respect to the traditional owners of the land, the Gadigal people of the Eora Nation, and also pay my respect to the Elders both past and present. I would now like to welcome Michael Cameron, the CEO of GPT Group, to present the results.

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• Good morning everyone and thankyou for joining us.

• Our disciplined, consistent and transparent approach has again delivered great outcomes for securityholders.

• The core business has driven EPS growth of 4.1% and a Total Return of 9.6%.

• During the year we completed $2.0 billion of asset transactions which has allowed us to re-mix the portfolio and further improve the quality.

• The funds management business continues to strengthen, raising $1.4 billion of new capital mostly from existing investors. The Office Fund again delivered leading performance, and the Metro Office Fund was successfully launched during the year.

• Our development capability has created significant value with a total value uplift of $75 million.

• GPT has a simple and straight forward business, together with a strong capital position with gearing of 26.3%.

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• Economic fundamentals remain mixed.

• Business confidence and consumer sentiment remain subdued though helped by the recent interest rate cut and lower fuel prices.

• Despite this, NSW and Victoria have continued a positive growth trend reflecting a rebalancing of the economy into non-mining sectors

• For GPT, retail conditions have improved, and in our portfolio occupancy costs have stabilised as sales growth is now more aligned with rent growth

• Our decision to focus exclusively on the eastern seaboard, with most of the office portfolio now in Sydney and Melbourne has paid off. We have benefitted from the increased demand from finance, service, and technology companies.

• In Logistics, the high demand for yield is driving returns.

• We continue to target a Total Return of greater than 9% and EPS growth guidance of 5% for 2015.

• I’ll now hand over to Mark Fookes.

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

• The statutory profit for the year was $645.3 million, which was up 12.9% on 2013. This was driven by the $249.5 million uplift in the value of the investment portfolio, partially offset by the $89.1 million negative mark to market movement on derivatives.

• FFO per security was up 4.1% on 2013, with 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 earlier in the year.

• A second half distribution of 10.7 cents was declared in December, bringing the total distribution for the full year to 21.2 cents, up 3.9% on the prior year.

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Focusing now on the segment composition of the result.

• Retail income was down 5.9%, primarily as a result of the sale of Erina Fair and three Homemaker assets completed in 2013. The retail portfolio had impressive comparable income growth of 2.9% over the period.

• Office income was 1.6% lower, with comparable portfolio income growth down 1.1%, reflecting the impact of higher average vacancy in the portfolio compared to the previous year. The strong leasing progress made during the year will see an increased contribution from the office portfolio in 2015 and beyond.

• Logistics income grew strongly, up 12.7% following recent acquisitions and development completions. Comparable portfolio income growth was down 0.5%, reflecting higher average vacancy this period.

• Wholesale Fund distributions were up 16.3%, arising from both distribution growth in the funds and an increased co-investment in the Funds by GPT after the successful capital raisings.

• 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.

• Corporate overheads increased with transaction costs associated with the acquisition of the CPA assets and the investment in a number of business optimisation projects taken above the line this period. Importantly total management expenses remain relatively low with a MER of 38 basis points.

• Net interest expense was 8.4% higher over the full year following the completion of acquisitions by the Group which resulted in a higher average debt balance, whilst our average cost of debt declined by 30 basis points.

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• Over the past couple of years the contribution to overall performance from the management divisions has increased significantly

• In 2014 we had a $36.2 million contribution to FFO from the management divisions, up 31%.

• This was driven by strong growth in the contribution from the funds management business and the increase in our logistics development activity.

• The success of the development divisions also contributed significantly to the Group’s overall NTA growth with $74.6 million in development uplifts flowing through into revaluation gains, with the main contribution being from the logistics developments undertaken at Erskine Park by John Thomas and his team.

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Importantly the Group remains in a very strong capital position.

• Net tangible assets increased 15 cents to $3.94, driven by the $249.5 million uplift to the value of the investment portfolio.

• Gearing, as a proportion of total tangible assets, is 26.3% and look-through gearing is 28.2%.

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

• The weighted average term to maturity of our borrowings is 5.8 years with the Group completing a number of capital management initiatives during the year.

• The balance sheet continues to provide us with substantial flexibility to execute on value enhancing opportunities as they arise.

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• We continue to actively manage the maturity and cost of our debt book with a further 15 year US Private Placement undertaken in the first half and a six year medium term note issued in the second half.

• Whilst swap rates have fallen significantly over the year we have recently seen a widening in credit margins, however the incremental all-in cost of debt remains low.

• The security buyback was active in the first half of 2014 and remains a capital management tool, however is not expected to be utilised given the current market price.

• Last month we redeemed all of the outstanding Exchangeable Securities at an attractive value for GPT securityholders. This was funded by an equity raising with the $325 million placement completed and the SPP closing this week, expected to raise the maximum $50 million.

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

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• Good morning

• The Results we announce today demonstrate that our strategy of actively managing the composition of the portfolio to drive leading performance is paying off.

• Over the past two to three years, we have transacted more than $4 billion in assets to ensure we have the right properties in the right markets.

• We sold a number of non-core retail assets and we have remixed our office portfolio, predominantly within GWOF, which has again produced sector leading performance. In logistics, the focus has been on improving quality and scale and we have achieved this through activating the land bank and by making acquisitions at the right time in the cycle.

• We have a solid core portfolio contributing 92% to Group earnings however we continue to seek opportunities which leverage the platform we have built and further improve performance.

• In 2014 the asset and investment management teams have worked hard to deliver results in a number of areas. Positive momentum in the retail portfolio has continued with specialty retail sales growth of 4.2%, among the highest in the peer group. A total of 188,000sqm of leasing was completed across the office platform, setting the portfolio up to deliver strong like for like growth in 2015. And the logistic development pipeline is being delivered ahead of budgeted margins.

• Looking ahead for the year, we continue to be focussed on driving portfolio operational performance and on delivering total portfolio returns. This will be achieved through active leasing and the rollout of our $3.3 billion development pipeline.

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• 2014 saw an acceleration in capital value growth, driving stronger total returns across real estate markets.

• GPT delivered a Group Total Return in excess of our target in 2014. The key contributor was the investment portfolio, which achieved a 9.3% Total Portfolio Return.

• The weighted average cap rate firmed 23bps to 6.27% over the 12 months.

• Whilst the capital growth was relatively broad based, long WALE logistics facilities have seen the most cap rate compression which is reflected in the 12.7% Total Portfolio Return for the logistics portfolio in 2014.

• The potential for further cap rate compression exists, given the global interest rate outlook. This is more likely in office where prime cap rates remain above historical troughs as opposed to logistics where we are starting to see cap rates at or below 6%.

• Looking at the sector performance, the office portfolio recorded 30bps of cap rate movement and a Total Portfolio Return of 8.6% for the year. This was impacted by the MLC Centre write-down in the first half and acquisition costs for CBW. A major contributor to performance was the 13.1% total return achieved by GWOF.

• The retail sector experienced moderate cap rate compression, with the weighted average cap rate firming 12 basis points to 5.87%. Alongside firming metrics, stronger NOI growth has been a key contributor to the uplift in valuations. The retail portfolio achieved a Total Portfolio Return of 9%.

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• Turning to the retail portfolio.

• GPT’s key operating metrics have improved across the board in 2014.

• Importantly, specialty sales growth was up 4.2% over the year, which is one of the highest among our peers.

• The key driver of sales growth is investing in the right assets in strong growth catchments and continued focus on improving the retail mix, as demonstrated by Rouse Hill where specialty sales are up 8.8%.

• Looking at sales by category, we continue to see solid results for service, food and leisure based retailers. Majors recorded mixed results with department and discount department stores continuing to show negative sales growth. Supermarkets were marginally positive.

• Comparable income growth was up 2.9%, reflecting strong contributions from Rouse Hill, Highpoint, Sunshine Plaza and Melbourne Central.

• Occupancy remains high at 99.5% and occupancy costs have fallen to 17.9% whilst productivity has increased.

• A $115 million uplift in valuations was recorded, with key contributors being Melbourne Central, Highpoint, and Charlestown Square.

• In 2015, we are positive about the outlook for retail, with a number of tailwinds likely to assist sales growth. Recent cuts in both interest rates and petrol prices and an increase in house prices should be a positive stimulus to consumer sentiment, particularly in the stronger growth economies of NSW and Victoria where 84% of the portfolio is located.

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• Over the past 12 months we have continued to improve the quality and performance of the portfolio through active remixing and progressing the $1.3 billion retail development pipeline. The focus of Anthony McNulty and the development team has been twofold;

• Firstly, expanding assets to maximise their potential within their specific markets; and

• Secondly, leveraging the potential within the portfolio of mixed use opportunities to provide additional returns whilst enhancing the existing centres appeal.

• On this slide you can see an example of one of those mixed use opportunities that we have delivered. The recently completed student accommodation development at Casuarina Square achieved a development profit of 25%, and has a 10 year lease to Unilodge.

• The $30m repositioning works at Dandenong were also successfully completed in 2014 with Aldi, Trade Secret, Daiso, and JB Hi Fi greatly enhancing the centres appeal and trading performance.

• In 2015, the team is focussed on commencing works on the new leisure and entertainment precinct at Casuarina Square, and progressing the major expansion opportunities at Rouse Hill, Sunshine Plaza, and Casuarina, together with mixed-use opportunities at Melbourne Central.

• The Fund is also progressing several major projects including Macarthur Square which is targeted to start this year.

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• 2014 was a big year for leasing for GPT and that played a key role in the successful completion of our portfolio repositioning strategy.

• Twelve months ago, 19% of the portfolio was either vacant or expiring during the year. Today, we have only 6% vacancy which reflects our portfolio management capability.

• The asset management team, headed by Matt Faddy, had a successful year in leasing. Including terms agreed, we leased 188,000 square metres for the year. This has resulted in:

• An improved WALE to 6.3 years;

• Increased occupancy of 94%; and

• A low and flat expiry profile into the future averaging 7.7% over the next 5 years, with only 3.6% in 2015.

• At the MLC Centre, we made material progress in leasing, which has increased occupancy to 85%. The portfolio is strong and well positioned for growth.

• Because of the high expiry in 2014, our like for like income growth for the year was negative. Excluding the MLC Centre, our like for like would be positive 2.6%.

• The purchase of CBW adds another high quality office asset to our balance sheet whilst at the same time growing funds under management.

• The successful sale of 818 Bourke Street, Docklands demonstrates our active management approach, with the sale price reflecting an IRR since acquisition of 11%.

• The portfolio achieved a total return of 8.6% for the year. A revaluation uplift of $58.3million was recorded.

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• We are in a strong position, with our office portfolio predominantly located in the country’s best performing markets, and exclusively along the eastern seaboard.

• The portfolio has 88% exposure to Sydney and Melbourne.

• In Sydney, the market is experiencing positive net absorption, a reduction in vacancy and an increase in net effective rents. We expect tenant demand to continue in line with the transition to the non-mining sector which will support growth in finance and business services.

• The majority of our leasing success has been in Sydney where we have increased occupancy at the MLC Centre, backfilled all of the Citibank contraction space at 2 Park Street and leased half of the vacant space at Governor Macquarie Tower. Importantly this leasing has occurred well ahead of supply that will start coming to the market in the later part of 2015.

• Melbourne is exhibiting similar metrics to Sydney although slightly lagging. Increased enquiry levels would suggest demand will continue to improve over 2015. The portfolio in Melbourne is 97% occupied with limited expiry over the next few years.

• Brisbane has been a difficult market. Whilst it appears the worst of the negative demand is behind us the market will be impacted by supply that gets delivered at the end of 2015.

• Our short term vacancies are minimal with just one floor at One One One Eagle Street remaining and 5.6% expiring over the next 5 years.

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• The investments we have made over the past few years growing our logistics development capability and growing the logistics portfolio have begun yielding meaningful results for the Group.

• The portfolio has delivered a Total Portfolio Return of 12.7% and $80 million in net revaluation gains and development profits.

• Our recent acquisitions and the development business were the major contributors to the total returns.

• The development business delivered an NTA uplift of $47 million from completed developments and projects under construction, whilst recent acquisitions delivered $18.7 million in revaluation uplift and a total return of 14.6%.

• The portfolio is performing well with income up 12.7% year on year due to completion of the Toll NQX facility in Brisbane, and completion of acquisitions in the second half of 2013. Our like for like for the year is down and is due to average occupancy falling, impacted mostly by a vacancy at Somerton.

• The portfolio is, however, well positioned:

• Occupancy remains stable at 95.3%;

• Portfolio WALE remains a strong 6.2 years following the inclusion of the Toll and TNT developments, and we expect this to increase to more than eight years upon the completion of developments at Erskine Park.

• As noted in our Interim results, 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 urban renewal, rezoning, reinvesting in assets and re-leasing.

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• Over the past 12 months we have disposed of assets, acquired land banks and invested in our development projects, all of which has assisted in driving our performance.

• We have been strategically recycling capital into our development business, with the release of $184 million in capital through the sale of four assets as part of the IPO of GMF.

• We delivered $181 million of prime logistics assets during the year including two of the best logistics facilities in the country both with 15 year WALEs.

• A further $228 million remains under construction.

• We currently hold $101 million in landbanks which is forecast to deliver 560,000 sqm of logistics and business park product with and estimated end value of $440 million. This landbank includes the acquisition of a 58 hectare site at Wacol, a prime industrial location in Brisbane’s south east. This site will be developed over a 5 to 6 year period with our joint venture partner, providing access to an estimated 325,000 sqm of product.

• Currently the Group holds exclusive positions on a number of opportunities that will further replenish our land bank and provide product for GPT balance sheet and or GPT managed funds.

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• 2015 will be another year focused on driving long term Total Portfolio Returns across the group. We are very comfortable with our sector weightings and don’t expect a significant shift in these allocations in the near future.

• Our high quality, diversified portfolio, combined with a growing funds management business will deliver strong shareholder returns over the cycle. There are a small number of non-core assets in the portfolio which we will seek to divest, capitalizing on strong investor demand. However, this will be minimal, with more than 95% of properties in the portfolio being core long term assets for the Group.

• To further strengthen quality and ensure growth in the portfolio, we will be progressing masterplanning on a number of our retail assets in 2015. Our expectation is that we will deploy capital in 2016 and 2017 in key catchments such as Rouse Hill, Casuarina and Melbourne Central. As always, we will have a very disciplined approach to capital allocation, with all investment decisions determined by their ability to generate long term returns.

• The key objective for office and logistics in 2015 will be driving occupancy. Bringing the office portfolio back up to more normalised occupancy levels will drive very solid like for like income growth in the year ahead. A key focus will be to continue the successful repositioning of the MLC Centre. Our office portfolio strategy remains focused on the Sydney and Melbourne markets.

• For logistics, our focus over the last few years has been in Sydney, where we have had success in rolling out the development pipeline. Our Erskine Park assets provide a strong foundation for the logistics portfolio with locked in rental growth from strong covenants.

• The GPT investment portfolio is in a strong position headed into 2015 We have passed the trough in office occupancy, which has been a headwind in recent years. In retail, the portfolio has moved from a period of sector down-weighting and trimming of non-core assets to a period of expansion via incremental development. In logistics, we have met our target to increase the scale of the portfolio and have dramatically improved the quality. The focus is now on delivering key operational leasing objectives through to 2017, as well as restocking the land bank to provide a pathway for future product.

• I now will hand back to Michael.

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• Thanks Carmel.

• 2014 was a year of success for Nick Harris and the Funds Management team.

• The strong response from investors to the capital raisings undertaken by both the Office and Shopping Centre funds is an indication of the quality of the transactions completed, the quality of the portfolios, and the overall strength of the funds management platform.

• The listing of the Metro Office Fund was the largest AREIT IPO in 2014 with $255 million of equity raised.

• The performance of GWOF positions it again as the leading core office fund over 1, 3 and 5 years. The one year performance was 13.1% compared with the index of 10.5%.

• We continue to explore new opportunities for the business that will deliver superior returns to the fund investors.

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• In wrapping up, GPT is in great shape to continue to deliver consistent and reliable returns from the core portfolio.

• The funds management business is going from strength to strength, and all parts of the Group are delivering profits.

• Our development capability allows us to grow the portfolio, and add significant value to the Group.

• We continue to demonstrate that disciplined capital allocation and capital management, and a simple, straight forward business will deliver consistent returns over the long term.

• Once again, thankyou for joining us this morning and I now invite your questions.

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