Growthpoint Properties Australia (GOZ) Earnings Call Transcript & Summary

Welcome to the combined Annual General Meeting of the shareholders of Growthpoint Properties Australia Limited, and a meeting of the unitholders of Growthpoint Properties Australia Trust, which are being held virtually this year. I am your Chairman, Geoff Tomlinson. We have a quorum for these meetings, and I'm pleased to declare the meetings officially open. On behalf of Growthpoint, I would like to acknowledge the traditional custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to the elders past, present and emerging and extend that respect to all Aboriginal and Torres Strait Islander peoples today. I would like to start by outlining some of the procedural matters of this meeting, given that we are hosting this online, which is new for us and maybe for many of you as well. The Board and I enjoy having the opportunity to meet with securityholders in person at our Annual General Meeting and are disappointed that we cannot do so this year due to the current government restrictions in response to the COVID-19 pandemic, and our commitments to prioritizing the health and well-being of securityholders, employees and the broader community. However, we have ensured that as far as possible, securityholders will have the same opportunities to participate in today's meeting as they would in a face-to-face meeting. As outlined in the notice of meeting, securityholders can ask questions of the Board during the meeting via the Lumi AGM online platform and vote in real time. The online platform is now open for securityholders' questions. We understand that there can be a delay between securityholders submitting their question and our receipt of the question. So please submit your questions as early as possible in the meeting. Please note that while you can submit questions from now on, I will not address them until a relevant time in the meeting. Questions submitted on the online platform may be moderated to avoid repetition of similar questions or summarized in the interest of time. We will endeavor to address as many of the more frequently raised questions as possible during the course of the meeting. However, there may not be sufficient time available to address all the questions submitted, so I encourage you to submit your questions early in the meeting. To ask a question on the -- to ask a question, press on the speech bubble icon. This will open a new screen. At the bottom of that screen, there is a section for you to type your question. Once you have finished typing, please hit the arrow symbol to send. Instructions on how to submit a question are also outlined in the virtual meeting guide on our website. In order to provide everyone with an opportunity to vote, and in case anyone cannot stay for the whole meeting, I will now formally open the poll on all resolutions. All polls remain open until the conclusion of today's meeting. If you are eligible to vote at this meeting, a new polling icon will have appeared on your screen. Selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options. There is no need to hit a submit or enter button as the vote is automatically recorded. If you do have any technical issues during the meeting, please call the number on this slide. A webcast of the meeting and all the presentations will be available on our website shortly after the meeting. The Notice of Meeting was made available to all securityholders and I propose to take it as read. I will now introduce our directors in attendance virtually today, Directors, Maxine Brenner, Estienne de Klerk, Grant Jackson, Francois Marais, Norbert Sasse and Josephine Sukkar; and our Managing Director, Tim Collyer. Also in attendance is Jacquee Jovanovski, our Company Secretary and Chief Operating Officer; Dion Andrews, our Chief Financial Officer; Michael Green, our Chief Investment Officer; and [ David Sherring ], a representative of our auditors, Ernst & Young. On behalf of the Board, I would like to acknowledge Maxine Brenner, who is retiring from the Board at the end of November. Maxine joined the Board more than 8 years ago and has played a vital role in Growthpoint's significant growth over this period. I would like to thank Maxine for her significant contribution, particularly for her work as Chair of the Audit, Risk and Compliance Committee, and wish her all the best for her future endeavors. A recruitment process to find a suitable replacement for Maxine is well underway and several promising candidates have been identified. We're looking for an individual with a strong financial background, who has had either a senior position at a large accounting firm or an ASX-listed company or both. Maintain the Board's gender diversity and balance of independent directors is also a focus. Turning to the agenda for today, we will commence with my address, which would be followed by a presentation by Tim Collyer, which will provide an overview of the business, including its recent performance and outlook. We'll then move to a consideration of the combined financial report for the company and the trust for financial year '20. I'll then explain the voting procedures and address each of the remaining items of business set out in the Notice of Meeting. As noted earlier in the meeting, questions can be submitted at any time. If you have a question already prepared, please submit it now on the online platform, so that I can answer as many questions as possible when I come to the relevant agenda or item. If your question relates to a particular item of business, please refer to that item of business when you submit your question. I would like to start my presentation by providing a brief overview of Growthpoint today. Growthpoint is the tenth largest REIT in Australia and a member of the S&P/ASX 200 Index. We own and manage 57 properties valued at approximately AUD 4.2 billion. Approximately 1/3 of the assets are industrial properties. The other 2/3 are offices. Our offices are located predominantly on the fringe of CBDs or in metropolitan locations. The resilient nature of our business model and assets was highlighted this year when the group's operating environment changed dramatically due to the COVID-19 virus. I'm pleased with the way the group has responded to the challenges presented by the pandemic. Our priority throughout this period has been to protecting the safety and wellbeing of our team, tenants and the broader community. We have implemented all government recommended steps to stop the spread of the virus. In March, we made a commitment to the Growthpoint team that we would support everyone through this challenging time with no reductions to fixed salaries or working hours. We've stayed in close contact with our tenants throughout this period. We reached out to a number of small tenants, such as operators or cafes in our office buildings, who we new would be significantly impacted by the virus and offered a rent-free period at the beginning of April. This was above and beyond what was required by the government's code of conduct. We are proud that we're able to help our small tenants, when it mattered the most, and we are continuing to provide assistance for these tenants, principally in Victoria. We also receive rent relief requests from a number of our larger tenants, which we have reviewed on a case-by-case basis. Since the beginning of the pandemic, we have granted approximately $3.4 million in rent relief, $1.3 million of rent abatement and $2.1 million of rental deferment. We also implemented a number of corporate measures to protect long-term value of the group. This included delaying all nonessential capital projects and operating expenses and implementing a group-wide hiring freeze. We entered this period with a robust balance sheet after a concerted effort to significantly delever over the past 6 years. Our gearing is currently below the bottom of our target range, which we believe is prudent in the current operating environment. We've had a strong support from our banking partners throughout this period. We entered into a new $100 million facility with a new banking partner in May on favorable terms, and we have extended and repriced $550 million of debt since that time. We remain well within our debt covenants and have no debt maturing until financial year '23. We are committed to ensuring our business operates in a sustainable way. Across our portfolio, we are looking for opportunities to operate in a more efficient way to reduce our environmental footprint. Key achievements this year include installing 2 solar panel systems, taking the total number of installations across our portfolio to 6. We also made a commitment to begin purchasing accredited renewable power for a number of key sites. We are pleased that our efforts and high green credentials were recognized by NABERS this year, who ranked our property portfolio as a top 10 most energy-efficient portfolio in Australia. We are committed to providing our tenants with high-quality accommodation that meets their needs now and into the future. This not only assists us to maintain good tenant relationship, but also to create ongoing value for our securityholders as tenants are more likely to agree to long leases. This year, we invested approximately $3 million to upgrade tenant amenities, including end of trip facilities at designated community areas. Ensuring Growthpoint as a great place to work remains a focus for the Board and management team, and we are pleased to see a significant improvement in both our employee engagement and alignment scores this year, putting Growthpoint in a top quartile of its benchmark group. This year, we introduced a new working from home policy, has significantly increased our paid parental leave entitlements. We hope that together these initiatives will help our teams strike the right balance between their personal and professional lives. I'm also pleased to announce that we have increased our Board gender diversity target to 30% of each gender by the 30th of June 2023. Achievement of this will be considered as part of our overall Board succession planning. On behalf of the Board, I would like to thank Growthpoint's executive team and all employees for their hard work and dedication to Growthpoint. The last 8 months have been particularly challenging, and we are proud of how the group has navigated this period. I will now hand over to our managing, Tim Collyer, who will provide a more detailed update on the business.

Thank you, Geoff, and good afternoon, everyone. I'd like to echo Geoff's sentiments around our disappointment that we cannot be meeting with you face-to-face as we normally would. I hope that next year, we'll be able to do so. Today, I'll provide an overview of our business, including a snapshot over the financial year '20 financial results, our recently completed development projects and outlook for the year ahead. In financial year '20, the group delivered a strong performance in a challenging year. In March, withdrew all forward-looking statements due to the uncertainty created by the COVID-19 pandemic. I'm pleased to report that we ended up delivering funds from operation growth ahead of this guidance and 2% higher than the prior year. The value of our portfolio increased over financial year '20, driven primarily by the significant leasing success we had in the first half. This included signing our longest lease agreement to date, 25 years, with our single largest tenant, the New South Wales Police Force for their Parramatta headquarters. During financial year '20, we made good progress with our debt book, taking the advantage of the low interest rate environment to refinance $400 million of debt and reduce our weighted average interest rate by 50 basis points. Last week, we also extended $315 million of debt with 3 of the major Australian banks. This debt was due to mature in December 2021, and this has been extended out to December 2023. Growthpoint enjoys a strong relationship with our financiers and this has really come to the fore during this COVID-19 period. While our earnings were not materially impacted by the COVID-19 pandemic, we decided to reduce our distribution payout ratio to retain a high level of cash within the group than normal. This was a prudent approach during an uncertain period. Our strong performance during this challenging period reflects the resilient nature of our portfolio as a result of our deliberate portfolio construction over the last decade or so. As Geoff mentioned, our exposure is limited to the office and industrial property sectors. Within the office and industrial property sectors, we have invested in well located, high-quality modern properties. We have carefully selected our tenants, favoring large, well capitalized companies and federal and state governments. On this slide, we have highlighted our top 10 tenants who make up approximately 48% of our gross income. I'm sure you'll recognize many of these names such as Woolworths, Linfox, Bunnings and ANZ, to name a few. We have also focused on maintaining a high occupancy, which is currently at 96% and having a long weighted average lease expiry, which is 6.4 years. During financial year '20, 2 development projects reached practical completion both ahead of time and on budget. In February, development of Botanicca 3, a new A-Grade office building in Richmond, around 5 kilometers from the Melbourne CBD, was completed. We were very pleased to announce at the beginning of October that Bunnings has signed a lease of 10 years and 7 months for 71% of this development, reinforcing our view that this is one of the best, highest quality metropolitan offices in Australia. In June, practical completion of the 25,000 square meter expansion of our Woolworths grocery regional distribution center in Gepps Cross, South Australia was reached. Woolworths now have a 15-year lease over the expanded property of 91,700 square meters of lettable area. Looking ahead, I want to provide our thoughts on a topic that is garnering a lot of attention at the moment. What will be the future of the office? There's been a lot of commentary since the outbreak of COVID-19 about whether the almost overnight transition to everyone working remotely will lead to a severe contraction in demand for office space. While initially, many people enjoyed working from home, there has been increasing recognition of the challenges. It has been difficult to stay connected with colleagues whilst working from home. It's also harder to develop company culture, innovate and collaborate collectively, mentor and develop junior team members when all interaction is done over a scheduled video call. We expect that in the future, there will likely be increased workplace flexibility than before the pandemic with very few organizations will see working from home exclusively as optimal for their business. In the short term, we think it is more likely that downward pressure on office demand will come from the challenging economic environment some companies are facing. Our office portfolio is well insulated against this due to our long weighted average lease expiry of 7.1 years, high occupancy and strong tenant base. Longer term, we believe metropolitan offices could benefit from some of the structural shifts, which are accelerating due to the COVID-19 pandemics. Approximately 89% of Growthpoint's offices -- office properties are located in non CBD metropolitan hubs. It is possible that more organizations will choose to adopt a hub-and-spoke office model, where they have an office in a CBD location and an additional office or offices in a metropolitan location. The primary benefit of this model is rental cost savings. By having a secondary office, organizations can reduce the amount of space required for their office in the relatively expensive CBD. Having an office close to where people live can reduce lengthy commutes and time spent on public transport. Many characteristics of metropolitan offices as compared with their CBD counterparts also makes them attractive in a post-pandemic world, such as large floor space to assist with social distancing, less levels within a building leading to shorter lift wait times and higher car parking ratios. To the outlook. There still exists a great deal of uncertainty about the year ahead. While Australia is very well placed with the spread of the virus now seemingly under control, we will not start to get a true understanding of the impact of the pandemic on business and individuals until well into 2021 or until a vaccine is approved and widely distributed. There appears to be significant cause for optimism regarding the availability of a vaccine in 2021. Certainly, the Australian economy will benefit greatly from the unprecedented fiscal support and stimulus measures of the federal government, whilst the RBA has dropped the cash rates to a historic low of 0.1%, is lowering long-term interest rates with its bond purchasing program and has provided substantial liquidity to the banking sector. Globally, we've seen many countries struggling to contain the spread of the virus and having to reintroduce lockdown measures with devastating social and economic impacts. As a result of this uncertainty, we have not provided funds from operations guidance for financial year '21. However, we understand the value our securityholders have placed on receiving distributions, particularly when many ASX-listed companies have stopped, deferred or significantly reduced dividends. So we have provided a distribution guidance of $0.20 per security which we expect will be paid in equal half year installments in financial year '21. At current pricing, this represents a distribution yield of approximately 5.4%, an attractive yield compared when compared to bank deposit rates and the 10-year bond rate. As I've highlighted today, the fundamentals of our business remain strong with a long-weighted average lease expiry, high-quality tenants and manageable near-term lease expiries. We also have a strong balance sheet, significant liquidity and ongoing access to providers of capital. I am confident that we are well positioned to continue to deliver value to Growthpoint securityholders over the long term. I will now hand you back to Geoff, and thank you for your attendance today and support of Growthpoint Properties Australia.

Thanks, Tim. We would now be happy to answer any questions you may have about the business. securityholders and their appointed attorneys, proxies and corporate representatives are permitted to ask questions. If you have a question, please submit it now on the Lumi platform. Questions will be read out to me in the first instance and I may direct them to the relevant person to answer as appropriate.

Chairman, we have received the following question from the Australian Shareholders' Association, from John Whittington. Mr. Chairman, retail shareholders are concerned that 2 new director appointments fall into jobs domain category. And we believe the only way to address this is by transparency about the recruitment process. We would, therefore, ask you to outline in more detail than you covered in your address, the process providing Ms. Brenner's successor.

Thank you. Thank you for the question. We are well into the process of finding a replacement for Maxine, responsibility for the exercise rest with the -- basically the committee, the Remuneration Committee. And basically at the moment, we have interviewed a number of people. We've reduced that number down to 2, and we are in the final selection process. So this is not a process about selecting friends and acquaintances. It's about finding people with appropriate skills to replace Maxine. So we're looking for a person who has had a period of time in a financial department of an ASX-listed 200 company or alternatively been a senior person in 1 of the large accounting firms because the person we recruit will become a director of the company, and we also anticipate that person to become Chairman of our Audit, Risk and Compliance Committee. So it's a very disciplined process, and I'm -- at this stage, we have some outstanding candidates, which is still subject to reference checking and some more interviews, but I would be hopeful that we can complete this process and make an announcement before Christmas. I stress the words, I'm hopeful. I'm not making any commitment at this stage, but that's my intention.

Chairman, we have received no further questions.

I will now move on to the official items of business of the combined meetings. The first official item of business is to receive and consider the financial reports and the reports to the directors and auditors in respect to Growthpoint Properties Australia for the financial year ended June 30, 2020. A combined annual report for the company and the trust was mailed to those securityholders who elected to receive it and is also available on the website of the ASX and the group. In addition to the Board and management, the company's current auditors Ernst & Young are in attendance to answer any questions securityholders may have in relation to the audit, the auditor's report, the accounting policies adopted and the independence of the auditor. Would anyone like to ask any questions or make comments about this item of business?

Chairman, we have received the following question from John Whittington from the Australian Shareholders' Association. Mr. Chairman, I think a lot of people find it curious that following the impact of the COVID pandemic, the valuation of Growthpoint's office portfolio actually increased by 4.5% in the year. How can the value of the office portfolio increase when it looks like work from home directions will be around for a while and when there seems to be social acceptance that there will be increased working from home post the pandemic?

I'll ask our Managing Director to answer that question.

Thank you for that question. Over the year, we had considerable success in extending leases within our portfolio. During the year, we leased about 19 -- by income, about 19% of the income within the portfolio and the weighted average lease expiry was extended from 5 years to 6.4. And subsequent to that, we have further extended that with the leasing of Bunnings. So the value of the properties really is a reflection of what's happening in the market. And as we know, bond rates and interest rates are going down, but also the solid income from the portfolio, which we have extended. And the primary reason for the increase in the valuations is the extension of the leases from government and other tenants. In regard to working from home, that is a longer-term trend to play out. We are still obviously receiving 100% income from all our tenants for a long period of time. A lot of the larger tenants have told us that they are moving firstly through the pandemic and then subsequent to that, they will determine their longer-term accommodation strategy.

Thanks, Tim. So I'll move on. There are 6 remaining items of business on today's agenda set out in the Notice of Meeting, which require a vote. The proposed resolutions comprising agenda items 2 and 3 in the Notice of Meeting relate to the company only, and the proposed resolution comprising agenda items 4 to 7 relate to both the company and the trust. All of the proposed resolutions related to agenda items 2 to 7, inclusive are ordinary resolutions, which require a majority of votes cast in favor to be carried. As mentioned earlier, all resolutions will be determined by poll, which is now open for voting. Christina Piccolo from Computershare will act as returning Officer for the conduct of the poll. Eligible securityholders, their attorneys, proxies and representatives can vote on all resolutions. Details of the proxies received on each item of business will be shown on your screen after discussion on that item of business. I am holding open proxies in my capacity as Chairman, and it is my intention to vote all available proxies in favor of each resolution. The next item of business are securityholders to adopt the company's remuneration report. This is a nonbinding advisory vote of securityholders. Although this resolution is not binding, the Board will give due regard to the outcome of the vote when considering future remuneration. The proposed resolution is on your screen. Are there any questions or comments? Any questions that relate to the proposed grant of performance rights for the Managing Director will be addressed when we come to agenda items 4 to 7.

Chairman, we have received no questions.

Thank you. Details of the proxies received are on the screen. As set out in the Notice of Meeting, a voting exclusion applies to this item of business. I'll now move on to Item 3A. The next item of business relates to Director reelections, Norbert Sasse, Grant Jackson and Josephine Sukkar, all standing for reelection. Details of the qualifications and experience of each director standing for reelection are set out in the Notice of Meeting. Each director has prerecorded a short message for securityholders. I'll now play Norbert's message.

Good afternoon, ladies and gentlemen. I'm disappointed that I cannot be with Chairman today to meet with you in person. However, I am pleased to have this opportunity to address securityholders. As group CEO of Johannesburg Stock Exchange-listed Growthpoint Properties, I've led the business for the past 20 years. During this time, Growthpoint has achieved substantial strategic growth from a listed property fund of ZAR 100 million in 2001 to a leading international property company with group assets of more than ZAR 160 billion today. It has also grown into a business that is recognized for sustainability and innovation as well as its commitment to the environment, society and good governance. Our investment in Growthpoint Properties Australia or GOZ, as it is more commonly referred to, have contributed to the success and remains an important part of our strategy to increase our exposure to international assets. Skills that I bring to the GOZ Board comes from nearly 30 years of experience in corporate finance, funds management and all aspects relating to listed property as well as being a chartered accountant. It has been a privilege to serve on the GOZ Board and to play a part in the group's delivering of substantial returns to all securityholders over the past 11 years, and I am pleased to be standing for reelection today.

Both resolution is on your screen. The directors in absence of Norbert unanimously recommend his reelection. Are there any questions or comments?

Chairman, we have received the following question from John Whittington from the Australian Shareholders' Association. Mr. Chairman, the Board composition is currently 4 non-independent directors and 4 independent directors with 1 of the independent directors due to leave soon. This means that the Board will not have the majority of independent directors. What is the proposed proportion of independent directors on the Board from December onwards? Would you also please outline to the meeting some of the procedures followed by the Board to protect those in a minority shareholder position?

At the moment, the Board consists of 4 independent directors and 4 directors who are deemed not to be independent. As previously advised, Maxine actually is retiring effective from the end of this month. And we are in the process of recruiting another director. I've previously advised the meeting that I expect or hope that, that director could be appointed before Christmas. So as a matter of fact, we will, for a short period of time, have 4 non-independent directors and 3 independent directors, but that we'll rectify within -- in a couple of weeks. So that's my best expectation. In terms of going forward, I believe that the skill set we have around our Board table is appropriate for the company we lead. And I don't believe it's appropriate for us to appoint another person just for the sake of actually having a so-called majority of independent directors. In terms of protecting the interests of the minority securityholders, we take that role seriously. All directors, and I stress, all directors, including representatives from GRT, take it seriously. And I think basically, if you look at our performance and look the way we've treated our securityholders, particularly in relation to capital raising, it's clear that we respect them and actually look after their interest to the best of our ability.

Chairman, we have received no further questions.

Thank you. Details of proxies received are on your screen. I'll now move to Item 3B, and this is obviously the reelection of Director Grant Jackson. I'll play Grant's message.

Hello, fellow securityholders. It is with pleasure that I offer myself for reelection today. I've been a member of Growthpoint's Board since its inception and I'm immensely proud of the group's transformation over the past 11 years. We've grown from a small REIT with a handful of industrial properties to 1 of the top 10 REITs in Australia today. Our industrial portfolio has increased significantly, and we've been -- we have diversified our portfolio now and own 1 of the largest portfolios of metropolitan office assets. Throughout this period of significant growth, the group has maintained its disciplined approach with a focus on high-quality, modern properties with strong tenant covenants. The resilient nature of our portfolio has been highlighted this year as we've navigated the challenges presented by the COVID-19 pandemic. I have around 34 years experience in the property industry, including 30 years as a qualified valuer. I'm currently the Chairman of m3property, one of Australia's leading valuation and advisory firms. I've experience across all property sectors, including office, industrial and retail markets. Due to my tenure on the Board and significant experience, I have a deep understanding of the group's portfolio and how it is positioned in the market. If reelected today, it is my intention to retire from the Board at the end of this term. I will use this period to assist with a smooth transition to new directors.

Ladies and gentlemen, as Grant mentioned, if reelected today, he intends for this to be his last term on the Board. Grant has served the Board for 11 years. The Board is satisfied that Grant's length of service as a director does not and will not interfere with this capacity to bring an independent judgment to bear on issues before the Board and to act in the best interest of the group and its securityholders. Grant's contribution to the Board is significant due to his experience in the property industry, specifically property valuation. Grant also has an impressive understanding of the group's portfolio as well as the broader market. We will use the next 3 years to find a suitable replacement for Grant. Due to Grant's significant expertise, this may take some time to facilitate in an orderly fashion and we'll take -- and we would like to have a period where Grant and his replacement are both on the Board. The proposed resolution is on the screen. The directors in the absence of Grant unanimously recommend his reelection. Are there any questions or comments?