Growthpoint Properties Australia (GOZ.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Growthpoint Properties Australia FY '25 results. [Operator Instructions] I would now like to hand the conference over to Mr. Ross Lees, Chief Executive Officer and Managing Director. Please go ahead.

Thank you. Good morning. My name is Ross Lees, CEO and Managing Director of Growthpoint Properties Australia. And I welcome you to our full year 2025 financial results. I'd like to begin by acknowledging the traditional owners of country throughout Australia, and their enduring connections to land, sea and community. Today, I join you from the land of the Wurundjeri people of the Kulin Nation, and I pay my respects to their elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples joining today. Presenting alongside me is Dion Andrews, our Chief Financial Officer; and Michael Green, our Chief Investment Officer. I'm also joining the room with Jacquee Jovanovski, our Chief Operating Officer; and Alix Holston, our Head of Investor Relations. Before we move to the results, I would like to provide a short overview of Growthpoint today. Since 2009, Growthpoint has been investing in high-quality Australian real estate and today has a focused portfolio of $5.4 billion in assets under management across 66 properties in the office, industrial and retail sectors. This is a combination of $4.1 billion directly held and $1.4 billion managed on behalf of wholesale and institutional investors. For the presentation today, I'll commence with a snapshot of FY '25 before passing to Dion to go through the financial results, Michael will provide a portfolio update, and I will conclude with the funds management update and our guidance for FY '26. This year, we continue to see volatility and uncertainty to find our operating environment. The impact of elections, both in Australia and the U.S., overlaid with geopolitical events in Eastern Europe and Middle East weighed on both investor and business confidence. Pleasingly, we have seen inflation in Australia return to the RBA target range, leading to 3 interest rate cuts commencing in February 2025, with expectations of more to come. This is an important change in direction as we have navigated the rising rate environment since early 2022. Notwithstanding the volatile backdrop I spoke of, this year, we have delivered on guidance and executed on our refreshed strategic priorities. Growthpoint delivered funds from operations or FFO of $0.233 per security, above our guidance, and we reduced gearing to 39.7%, down from 40.2% following targeted capital recycling throughout the year. The portfolio is well positioned following solid leasing activity with an occupancy rate of 94%, underpinning our weighted average lease expiry of 5.6 years. Our refreshed strategy has clear strategic pillars, and we delivered measurable progress against all 4 of these. The active management of our directly held portfolio delivered like-for-like growth in property FFO of 2% for office and 6% for industrial as well as significant leasing, which has contributed to high occupancy and consistent weighted average lease expiries. We created momentum growing our Funds Management business, launching 2 new funds under the Growthpoint banner, generating $328 million of new assets under management and raised $170 million of equity in our unlisted funds to support this growth. We generated $335 million of cash proceeds from asset recycling and co-invested $30 million in new unlisted funds, ensuring our alignment with the investors in these funds. And our commitment to sustainable future proofing has continued throughout 2025, and we reached a significant milestone, achieving our net 0 target on 1 July 2025. I'll now pass over to Dion to cover our financial results in more detail.

Thanks, Ross. Given this is the last set of results I'll be presenting for Growthpoint, I'm glad to be finishing with the business in a strong position. There are several key outcomes I'd like to highlight. Property FFO increased 3.2% on a like-for-like basis, which excludes lease surrender payments which were higher in FY '24, as well as divestments. This is indicative that overall rents are turning positive for the group. Total property FFO decreased, reflecting the impact of property divestments, fuel lease surrender payments and a reduction in distributions from Dexus Industria REIT. The DXI distribution reduction totaled $6.1 million versus the prior corresponding period, although the reduced income from this capital release was offset by lower interest expense as debt was repaid. The momentum in Funds Management is now adding to the returns of the group, with revenue increasing by 20% to $9.6 million, driven by the launch of 2 new funds during the year. Net finance costs reduced mainly due to the divestment of assets, offset by maturing cheaper fixed interest rate swaps rolling off. Distributions totaled $0.203 per security, which included a one-off distribution of $0.021 to aid investors with paying capital gains tax in relation to the sale of assets into the Growthpoint Australia Logistics Partnership. Excluding the one-off distribution, the payout ratio was 78% within our target range of 75% to 85%. Despite declining asset values, we see gearing reduced to 39.7% through capital recycling over the year. Given valuations are now starting to stabilize, their impact on gearing should not be material compared to the past few years. The reduced gearing was achieved by vending of 6 industrial assets into the Growthpoint Australia Logistics Partnership. The sale of another industrial asset at 3 Millennium Court in Victoria and the disposal of our stake in Dexus Industria REIT, which all that released $335 million of capital. $37 million of this was put to work in co-investments in Growthpoint managed funds. Gearing is below the midpoint of our target range and leaves us with a comfortable buffer to our LDR covenant despite an extended period of cap rate expansion. Strategic capital management has seen us end the year with all near-term debt maturities addressed. With $645 million of debt transactions executed in second half '25, our weighted average debt maturity moves out to 3.9 years, with no expiries until December 2026. This includes $320 million converted to sustainability linked loans, bringing the total to $1.3 billion. If Growthpoint continues to achieve the sustainability targets in these loans as it did in FY '25, then discounts will continue to be obtained with a larger pool of loans increasing the benefit to the group. Our weighted cost of debt moved up to 5%, reflecting some cheaper hedges rolling off during the year. Given the cash rate has been moving down with the latest cut to 3.6% in August and the fixed rate debt stabilizing around 3.3%, the weighted average cost of debt should be at or near its peak. With that, I'd like to hand over to Michael to cover off on our portfolio of directly held high-quality assets.

Thank you, Dion, and congratulations on your great career at Growthpoint. Slide 11 provides a snapshot of our directly held portfolio, with the team's asset management expertise has again been demonstrated with significant leasing across both our office and industrial portfolios. Further to the 123,000 square meters of space leased during FY '25, we have agreed terms on an additional 90,000 square meters of leasing post balance date, providing excellent momentum into FY '26. We are focused on driving income and maintaining high occupancy across our portfolio, a 94% portfolio occupancy rate and a 5.6-year weighted average lease expiry, a testament to these efforts. The portfolio's high-quality income is underpinned with over 80% of the income derived from listed companies and government tenants. Moving to Slide 12, we can see that capitalization rates and valuations are stabilizing across Growthpoint's portfolio, reflecting market trends. Our office portfolio value declined by 7.4% on a like-for-like basis over FY '25. The majority of the contraction was attributed to the first half of the year with values from all states other than Victoria largely flat in the second half. The group's industrial portfolio increased by 4% on a like-for-like basis, driven by stabilized yields, rent growth and the lease extension at the Perth distribution center for Woolworths. While the industrial leasing market is normalizing, the strong fundamentals and weight of capital are likely to provide sustained demand for the sector. Moving to Slide 13, which emphasizes the quality of our highly green credentialed modern office portfolio. Pleasingly, we have increased our landlord satisfaction rating to 8.2 out of 10 over the year, reflecting the hard work of the team and our ongoing focus on creating value beyond real estate. Slide 14 highlights the active leasing across our office portfolio, which delivered 2% like-for-like property FFO growth. During FY '25, we completed over 23,000 square meters of leasing across 36 deals with an average lease term of 5.1 years, representing 6.6% of office portfolio income. Post balance date, we have continued our leasing momentum, securing terms across 15 tenancies covering over 19,000 square meters and accounting for 24% of both existing vacancies and FY '26 expiries, positioning us well for the year ahead. Approximately half of the aggregate office leasing has been undertaken within our Victorian office portfolio. Conditions are improving across the office markets in which Growthpoint invests, evidenced by positive net absorption, face and effective rent growth and vacancy declining to 13.5% from 14.5% over the year. These evolving market conditions are providing the backdrop for the positive leasing momentum across our portfolio and a stabilization of office valuations. Moving to Slide 16, our modern industrial assets are well located and leased to high-quality tenants. Over the year, we have actively increased the industrial portfolio WALE to 5.8 years from 4.9 years. Occupancy reduced slightly to 98% during the year due to a vacancy at our Preston asset in Victoria, which we are actively marketing for lease. Growthpoint's customer-centric approach resulted in the agreement and commencement of the significant expansion of the Woolworths regional distribution center in Perth. Practical completion of these works is forecast by the end of 2026, post which the Woolworths lease will be extended by 10 years. Across the year, we completed over 100,000 square meters of leasing, equivalent to 18.2% of industrial portfolio income, agreeing an average lease term of 10.9 years and positive leasing spreads of 25%. Pleasingly, we delivered 6% like-for-like industrial property FFO growth over the year. Post balance date, we have continued our leasing momentum, securing terms across 4 tenancies covering over 71,000 square meters. This includes 53% of all existing vacancies and FY '26 expiries. Industrial occupier markets remain tight with a national vacancy rate at 2.8%, up from 1.9% in FY '24. Rental growth has continued moderating over the year, however, is still healthy at 6.3%. Speculative construction activity is reduced with most new developments backed by tenant precommitments, ensuring supply is closely aligned with future tenant demand. After 3 years of expansion, industrial market yields compressed in the second half of FY '25. Looking ahead, low vacancy rates and sustained demand are expected to continue supporting positive rent spreads across Growthpoint's portfolio with an average spread of 25% achieved in FY '25. I'll now hand back to Ross to discuss funds management and the outlook.

Thanks, Michael. Growing funds management is a key pillar of our strategy. Through our funds management platform, we now manage $1.4 billion of assets across 11 unlisted funds. These operate in our chosen sectors of office, industrial and retail with an investor base of institutional partners and wholesale syndicates. It's been an important year for our funds management business as we launched the first 2 funds under the Growthpoint banner, creating $328 million of new assets under management. And most importantly, over 45% of the investors into these funds were new to our funds management platform. This included the Growthpoint Australia Logistics Partnership, which was seeded with 6 directly owned industrial assets has since grown following the acquisition of a $40 million property in Stapylton. Further, we established the Growthpoint Canberra Office Trust to acquire $90 million asset in Canberra CBD with our wholesale syndicated investor base. In total, we raised $170 million of gross equity. This momentum has been reflected with an increase in funds management revenue of 20%. As we approach FY '26, we will continue to pursue growth refunds management, whilst actively managing our near-term fund maturities. We intend to succeed by leveraging our key points of difference, which we see as our customer engagement through leveraging a high-quality customer base across our directly held or managed portfolios where we have access to tenants to drive occupancy and market insights. Our capital position gives us the ability to meaningfully co-invest alongside our investors and also generate returns for Growthpoint securityholders and most importantly, our capability, our dedicated team specializing in our chosen asset classes, which are spread across office, industrial and retail and our East Coast offices have an ability to deliver hands-on active management. We've been active in the market and we have a clear strategy of investing in our specialty sectors with assets of $50 million to $200 million and partnering with institutional and wholesale syndicate investors. On to sustainability. This is a key pillar in our strategy and is a defining feature of the Growthpoint business. We focus on this as we know this directly translates into higher tenant inquiry, occupancy and customer satisfaction across our portfolio and will drive returns over the long term. This year, achieving a net 0 target on the 1st of July was a significant milestone for Growthpoint. Over the year, we met all sustainability-linked loan performance targets and increased the quantum of these loans on issue to $1.3 billion, accounting from a 68% of our loan book. We continue to demonstrate our progress in sustainability with our GRESB score, increasing that to 85%, exceeding the peer average of 76% and ranking second in our peer group. Our average NABERS ratings for Energy and Water remained stable at 5.2 stars and 4.9 stars, respectively. We've also improved our NABERS indoor environment rating to 5 stars. 75 Dorcas Street became the first building in our portfolio to be certified carbon neutral. And it's a tangible example of how we're helping tenants to meet their own sustainability goals whilst creating future-ready workplaces. Moving to the outlook. At our half year results presentation in February, I announced Growthpoint's for fresh purpose of creating value beyond real estate. Our vision is to create sustainable value in everything we do by being a forward-thinking trusted partner of choice. We formalized our strategy to deliver growth through funds partnerships underpinned by income-driven returns from directly held high-quality real estate assets, and we outlined our strategic pillars and foundational strength. Looking to our key focus areas for FY '26. As Michael said out, leasing remains a key focus, addressing current vacancies and key upcoming expiries. Targeted capital expenditure will be directed at minimizing downtime and enhancing asset values. The terms agreed on over 90,000 square meters of space in FY '26 to date representing 7.5% of our portfolio income, we've made solid inroads. As we also noted, we will continue to prioritize growth through funds management focused on our core sectors. We intend to allocate capital to support co-investment in new funds, ensuring alignment with our invested fund investors and allowing Growthpoint securityholders to benefit from the underlying fund performance. And following the achievement of our net 0 target, our sustainability focus shifts to continuous improvement in NABERS, progressing climate reporting and post net 0 initiatives. With ongoing optimism from a stabilizing rate environment under a renewed strategy, we look forward to carrying our momentum into FY '26. We provide FFO guidance of between $0.228 and $0.236 per security for financial year 2026, noting that this does not assume any impact from acquisitions or disposals of direct assets. And we also provide distribution guidance of $0.184 per security, an increase of 1% on the ordinary distribution that was paid in FY '25. Based on our most recent closing price, our guidance implies an FFO yield of 9.1% at the midpoint of the range and a distribution yield of 7.2%. I'd like to thank our team for their dedication and contribution to our performance in FY '25, and we also acknowledge our tenants, suppliers and other key stakeholders for their continued support. Finally, I would like to acknowledge that this is Dion Andrews' final results after 15 years at Growthpoint. Dion has made significant contributions to Growthpoint's success during his 15-year tenure. And on behalf of the Board and the management team, we would like to thank him for his commitment to Growthpoint over that time. Thank you for your participation today. I'd now like to open the line to questions either online or via the call. In the first instance, please direct them to myself if there's any questions, please go ahead.

[Operator Instructions] Your first question comes from Callum Bramah of Macquarie.

Just in relation to the guidance, I just wondered if you could give us a little bit of color on some of the assumptions you've made particularly around occupancy. And maybe if you think about it, whether it's period end or average rent paying occupancy over the period, particularly in office and industrial, noting, I guess, the leases that you've signed post balance date. And I also just was wondering if you could give a little bit of color on what you're seeing in the way of rents and under-renting in industrial as well, I think, was plus 25% in fiscal '25. The other 1 was whether or not you assume any sort of funds or what we should think about is the funds contribution? Because I think the second half was around $3.7 million from memory, so you'd annualize then at $7.4 million or should we be assuming that you will launch funds and get transaction fees? Maybe I'll just hold there.

Thanks, Callum. Thanks for your questions. I'll tackle couple of parts, and I'll pass to the guys for any further detail. I might start bottom to top, Callum. So as it relates to the contributions to our guidance, particularly from funds, leasing. On the fund side of things, we had that skew first half versus second half. And that was really driven by the new fund creation we had during the year, which drives those upfront fees happened in the first half, where we didn't have that in the second half. So our activity was stacked in H1 to H2 as we look back on FY '25. As we look forward to FY '26, within our guidance we're assuming a similar amount of fund creation to what we had in FY '25 for the full year. As we get to occupancy, we commenced the year with 93.8% occupancy. As Michael and I touched on, we've made some good inroads into the lease expiry that we've got in FY '26 upon us and a couple of the major, particularly in the industrial side has subsequently being derisked post 30 June. We're really assuming over the course of the year, it's 1 of the reasons we have a range in our guidance because as time goes on, we'll have better visibility on both fund creation and leasing targets. We're assuming a broadly similar amount of occupancy throughout reporting periods through the year. Anything else that sits within the guidance, I think probably the only other thing to note that's relevant is whilst we're seeing our [ WACD ] stabilize the comment that Dion made, we had some lower cost swaps come off in June 2025, and another couple still rolling off in FY '26, that will contribute to interest costs continue heading into FY '26.

So across the portfolio, Callum, the industrial portfolio is 11% underlet against valuation rents. But if you look forward into the sort of FY '26 expiries, it's more like 15%.

Our next question today will come from Richard Jones of JPMorgan.

Just pass on my well done to Dion too on a long tenure at Growthpoint. Question just further on the color on the industrial side there. Can you just call out a couple of the major deals that you've done post balance date and what spreads you've booked?

I'll pass over to Michael to touch on some of that. I'm not sure how much we can go into on some of the rents booked, but you can maybe give a bit of color on where that leasing has come from?

As I mentioned in the call, we've done 4 lease extensions across the book and probably can't talk about the actual deals quite yet because they are commercially sensitive. I expect that we'll be able to announce more on that quarterly.

And the comment you made about 15% under rent in '26 is consistent with the spreads you're getting then?

Yes. I mean we have the major expiry, which we have finalized during the year is the Linfox expiry at Lenore Drive. So that was the key 1 that we wanted to take care of in the first half and they've pleasingly extended their lease. Yes, we'd aim to get similar leasing spreads to what we achieved in FY '25 across what we're doing in '26.

And Michael, just on the major office expiries for '26, 2 or 3 you can call out and what your expectations are? Can you work through that as well?