Growthpoint Properties Australia (GOZ) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Growthpoint Properties Australia FY '24 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Ross Lees, CEO and Managing Director. Please go ahead.

Good afternoon and welcome to the 2024 full year financial results for Growthpoint Properties Australia. My name is Ross Lees, CEO and Managing Director of the group. Before we start the formalities, we would like to acknowledge the traditional custodians of country throughout Australia and recognize their continued connection to land, water and community. We pay our respects to elders past and present and extend that respect to First Nations people. Presenting alongside me this afternoon are Michael Green, Chief Investment Officer; and Dion Andrews, Chief Financial Officer. Also present in the room for Q&A are Jacquee Jovanovski, our Chief Operating Officer; Sam Sproats, our Head of Funds Management; and Luke Maffei, our Investor Relations Manager. I'll start this afternoon with a brief introduction and summary, Dion will give a more detailed review of our financials, Michael will then provide an update on our property portfolio and I will conclude with an overview of the funds management business then provide a market outlook, along with my initial observations since joining Growthpoint. We will then take questions. On Slide 4, we provide a snapshot of the group. Since 2009, Growthpoint has been investing in high-quality Australian real estate. Today, there is $6 billion in total assets under management across the industrial, office and retail sectors. We directly own and manage 57 high-quality modern office and industrial properties valued at approximately $4.4 billion. Further 9 assets valued at $1.6 billion are managed on behalf of third-party wholesale syndicates and institutional investors through our funds management business, which invests in office, retail and mixed-use properties. And our business is supported by an experienced team of over 60 professionals located in offices on the Eastern Seaboard. Turning to Slide 5 and the FY '24 strategic highlights. Firstly, I would like to thank the former Managing Director, Tim Collyer and the Growthpoint team for delivering this year's solid result in what has been a tough market, particularly for the Australian real estate sector. FFO was delivered above upgraded guidance and the team maintained a disciplined approach to capital management, extending various bank debt facilities as well as selling an industrial asset in South Australia, well above book value to repay debt. We delivered strong leasing across the portfolio, maintaining 100% occupancy in our industrial portfolio and increasing occupancy in the office portfolio to 92%. In funds management, the disciplined approach to capital transactions was the right one. The business is now well positioned to prioritize growing funds under management in FY '25. Growthpoint is committed to operating in a sustainable way and on target to achieve net 0 across its directly owned office assets and corporate activities. This includes maintaining high NABERS ratings and realizing interest margin reductions through our sustainability linked loan program. I will now hand over to Dion to go through financial performance in FY '24.

Thanks, Ross. Slide 7 provides a performance summary for FY '24. There is more detail on these figures as we progress through today's presentation, but I did want to again call out our FFO performance with the final $0.239 per security coming in 3.5% above the top of our initial guidance range provided in August last year, a good result in a tough environment. Some great leasing outcomes, the floating interest rate being a little lower than expected and tight cost control all contributed to that result. Now, turning to our financial results on Slide 8. The key item to call out here is that our like-for-like property FFO increased by 2.3%, excluding the impact of surrender payments in both periods. Investors may recall that FY '23 property FFO was substantially higher due to 2 key surrender payments occurring in that year. The net movement in these payments in FY '24 compared to FY '23 is a decrease of $14.5 million, a key reason why property FFO is down versus last year. FY '24 is also negatively impacted by the sale of 2 properties, although interest expense is also lower than it would have been due to these transactions. The other key driver for the year was the increase to finance costs, with the weighted average cost of debt increasing over the year off the back of higher average floating rates and some cheaper swaps rolling off. On Slide 9, we take a look at our capital position moving into FY '25 and as you can see, we are in good shape. The key takeout from this slide is that our gearing is at the midpoint of our target range and that we are operating well within our covenants. Our LVR covenant is 60%, meaning that property values could fall by a further 29% before we reach that level. The other key takeouts are we remain well hedged and we continue to enjoy excellent support from our financiers, extending a number of our debt maturities during the year. We extended $470 million of facilities that were maturing in either FY '25 or FY '27 into future years, reducing our refinance risk considerably in the short to medium term. We still have 1 fixed debt facility of $200 million maturing in March 2025. However, given that facility has an all-in fixed interest rate of 4.67%, we intend to let that facility run to maturity when it will be repaid from existing debt headroom. At 30 June, our debt facilities have a weighted average remaining term to maturity of 3 years, and we retained just under $300 million of liquidity from undrawn facilities. The group also was also active on the derivatives front, entering into a number of interest rate swaps with a total notional value of $395 million at a weighted average fixed rate of 3.7%. $180 million of these swaps have forward starting dates, mainly towards the end of FY '25. I'm also happy to convey that Moody's have reaffirmed their Baa2 rating with a stable outlook for our debt. I'll now hand over to Michael for a review of the direct property portfolio.

Thanks, Dion. Turning to Slide 11. We highlight the key metrics of the group's $4.4 billion directly owned property portfolio. Growthpoint's modern A-grade metropolitan office portfolio continues to perform well, with occupancy increasing from 90% to 92% over the last 12 months. The portfolio's high green credentials continue to appeal to government tenants where we derive 40% of our office income. Across our modern logistics portfolio, we maintained 100% occupancy whilst undertaking over 60,000 square meters of leasing, where we witnessed average net effective leasing spreads of positive 31%. Active office market leasing has increased the group's overall portfolio occupancy to 95% and our weighted average lease expiry is a healthy 5.7 years. On Slide 12, we highlight the successful office leasing across the year, where we signed 44 leases across 47,000 square meters, equating to 12.5% of the office portfolio income and increasing occupancy in the office portfolio from 90% to 92%. The weighted average lease term of the new leases was 6.4 years, which further evidences government and businesses' willingness to commit for meaningful lease terms at Growthpoint's high-quality assets. Of the 44 leases signed, 32 were to new tenants to the portfolio and 12 were renewals. The renewing tenants leased the same quantum of space that they were previously leasing. Average incentives across the leases signed was 23% and 50% of the office leasing in the period was contracted with government entities, which will continue to underpin the high quality of the group's income into the future. Major leasing results included the lease extension of over 15,000 square meters at 10-12 Mort Street, Canberra with the Australian government for 5 years and the 4,300 square meters that we leased to the National Heavy Vehicle Regulator at 100 Skyring Terrace, Newstead, in Queensland for over 10 years. In FY '25, we remain focused on leasing the balance of 5 Murray Rose Avenue in Sydney Olympic Park, where we have approximately 10,000 square meters to lease. We're in discussions with several potential tenants and we are buoyed by the recent New South Wales government statement to direct their employees back to the office. This should encourage higher occupancy across all New South Wales markets, particularly markets like Sydney Olympic Park, which is a hub for government entities. Lastly, we were very pleased again to record top spot within our peer group of 11 for landlord satisfaction. Turning to Slide 13. Net absorption in Growthpoint's office markets has consistently outperformed other office markets over the last 4 years by 800,000 square meters. Growthpoint has over 50% of its office portfolio concentrated in the Melbourne and Brisbane fringe office markets, which have outperformed all other office markets in terms of net absorption in the COVID and post-COVID period. We have always focused carefully on stock selection in markets with attractive long-term fundamentals. And this disciplined approach, combined with the group's active asset management, has resulted in the relative outperformance of the group's office portfolio, where our office occupancy levels exceed market norms. Turning now to Slide 14 and the Brisbane fringe office market, where 23% of Growthpoint's office portfolio is situated. The Brisbane fringe office market is benefiting from Brisbane's substantial infrastructure pipeline, where the government has earmarked $89 billion of government projects for the next 10 years. Government infrastructure and population growth are driving the demand in office leasing, increasing rents and net absorption, which is translating to a decline in vacancy from 14.8% to 11.4%. Effective market rental growth of 10% over the year has been recorded. Growthpoint as one of Brisbane fringe's largest office landlords has undertaken 15,000 square meters of leasing over the year, equivalent to 19% of the group's Brisbane fringe portfolio, attracting numerous government and listed groups to a high-quality portfolio. There is a lack of new supply forecast to be delivered into the market, which is likely to maintain upward pressure on market rentals. Economic rents required to feasibly underwrite new office development are approximately 25% higher than the prevailing market rents for A-grade Brisbane fringe office space. A third of the group's office leasing over the next 24 months is concentrated within our Brisbane fringe portfolio. Turning to industrial leasing on Slide 15. We were pleased to maintain the portfolio's 100% occupancy rate whilst executing 6 leases for 61,000 square meters over the year, representing 7.9% of industrial portfolio income. The weighted average lease term of the new leases was 6 years with a weighted average annual rent review of 3.6%. With an ever-present focus on income growth, we achieved excellent effective re-leasing spreads on new leases of 31%. Overall leasing activity remained robust with demand originating from the transport, logistics and warehousing sectors. Of the 6 leases signed, 1/2 were with new tenants, with an average letting up period of 1.5 weeks. Average incentives on new leases was 15%. The group was pleased to renew Laminex for another 5 years across 28,000 square meters at 130 Sharps Road in Melbourne Airport. Pleasingly, our landlord satisfaction score ranked second in our peer set in our annual survey. Turning to Slide 16 and our weighted average lease expiry, which remains long at 5.7 years. Growthpoint benefits from one of the longest office weighted average lease expiries in the REIT sector at 6.1 years, whilst the industrial weighted average lease expiry is 4.9 years and is leveraged to positive re-leasing spreads. Growthpoint is positively exposed to industrial rent reversion over the short to medium term. 39% of our industrial leases are expiring between financial years '25 and '27 and these leases are currently 16% under rented versus market valuation rents. Our asset management team has a strong track record in outperforming these expectations. Our upcoming lease expiries in financial year '25 are predominantly in markets that have experienced positive net absorption in 2024 or in markets with lower vacancy. This provides us with a high degree of confidence in leasing up this space. Turning to Slide 17. Growthpoint remains committed to operating sustainably and we've maintained our high NABERS energy rating of 5.2 stars across the year. Pleasingly, we've also increased our GRESB score by 3 points to 84 and have again been acknowledged by GRESB as a sector leader in our space. The group continues to progress towards our 2025 net 0 target, including increasing the quantity of both on and off-site renewable energy for our base building electricity needs. Over the year, Growthpoint entered into an additional $500 million of sustainability linked loans, bringing the group's total sustainability-linked loans on issue to over $1 billion. Interest margin reductions have been achieved as the group has exceeded all targets, which are tied to sustainability-related KPIs. Further details on our sustainability journey will be published in our sustainability report in September. I'll now hand back to Ross to discuss fund management and the outlook.

Thank you, Michael. Growthpoint's fund management business, led by Sam Sproats, manages $1.6 billion of assets for third-party investors. The funds management business currently invests in office, retail and mixed-use properties in Sydney, Brisbane and Adelaide via a series of closed-end funds. The business has a 30-year track record of investing through multiple cycles with an extensive network advantage. We continued to seek new opportunities during FY '24 and maintained a disciplined approach to capital market transaction in what was a challenging environment. The group completed the sale of Taylors House for $87 million, achieving IRR of 11% over the 7-year term. During the period, the term of several funds was extended, representing approximately 25% of total funds under management, allowing for more appropriately timed exits. The group expects further roll-off of closed end funds in FY '25. Despite the subdued year, Growthpoint remains committed to growing funds under management across office, industrial and retail sectors for institutional and wholesale syndicates. I will now move to our outlook. Turning to office supply in Growthpoint invested markets on Slide 21. Supply peaked in these markets in 2022 and is trending down. Office completions are expected to moderate as elevated construction and finance costs impact development feasibilities. As Michael touched on earlier, this is especially the case in the Brisbane fringe where there is no new supply under construction. Whilst vacancy rates across office markets are currently at elevated levels, we see demand coming from the combination of strong population growth and the reversal of work from home trends. Where supply can come online, it will require rental levels significantly above prevailing market rents. As a result of this dynamic, we believe that high-quality, well-occupied assets like those held by Growthpoint are most set to benefit. Turning to the industrial markets on Slide 22. Industrial rents across Australia continue to trend upwards in FY '24, driven by ongoing demand-supply imbalance that has left most markets with limited relocation options for occupiers. We've observed an increase in vacancy rates. Despite this, vacancy rates remain sub 2% on average and one of the lowest globally. Similar to my comments about the office sector, we see elevated construction costs putting continued upwards pressure on the rental required to create new supply and this is expected to underpin rental growth going forward. The growing preference for industrial properties remains strong, notwithstanding current economic headwinds around inflation and interest rates. Investors are recognizing the improving risk return prospects and this is underpinning investment activity. Before turning to the FY '25 guidance, I wanted to provide some initial observations since joining Growthpoint in late May. I've now visited all 66 assets owned by all managed by Growthpoint and have spent time meeting and listening to our key stakeholders. What has stood out is that we have an experienced team and a business with a substantial high-quality real estate portfolio across office, industrial and retail sectors. The strength of relationships with tenants and stakeholders is a reflection of the team living the Growthpoint values and delivering for our tenants and investors. Our sustainability program is also market-leading, evidenced by our GRESB sector leader scores and advancements in our sustainability-linked loan program. We have a solid platform for growth and we can leverage our scale, presence and capability in modern office, industrial and retail real estate to expand our funds management offering. Turning to FY '25 guidance. Given the outlook and factoring in interest rate costs on floating debt going forward, we provide FFO guidance of between $0.223 and $0.231 per security for financial year 2025. We also provide distribution guidance of $0.182 per security, while maintaining our payout ratio in the target range of 75% to 85% at the midpoint of guidance. We remain committed to providing our security holders with sustainable income returns and capital appreciation over the long term. Thank you for your participation today and I'd also like to thank the Growthpoint team for their hard work in delivering these results. We will now open up the lines and we're happy to take questions and I would ask that any questions are directed to me in the first instance.

[Operator Instructions] Your first question comes from Caleb Wheatley from Macquarie. Congratulations, Ross, on the new role. My first question, just around the renewed focus on the funds management platform. Just keen to hear how you're thinking about Growthpoint's competitive advantage in the space, particularly with several of your peers also flagging a focus on a transition to more of these capital-light structures as well, please?

Sure. Thanks, Caleb. So as part of the business that Growthpoint obviously stepped into in 2022 through the acquisition of Fortius, the markets have obviously been tricky for a couple of years with interest rates being high, affecting transaction volumes and also affecting investors' appetite to invest when there's been pretty attractive rates on bank deposits. Thinking about the strategy going forward, what we're really looking at is combining institutional opportunities as well as wholesale syndicates. And at the moment, we're seeing attractive opportunities in the wholesale space where there's higher yield opportunities with retail and office assets and in the institutional space, we think the most accessible areas for logistics at the moment. But over time, we'd like to build out all the asset classes in which we operate across the various forms of capital.

Okay, great.

And I think just the other question, sorry, Caleb, you did ask about competitive advantage. I think there's a couple of key pieces. Given the size of where we are, we are largely conflict-free for groups looking to invest, which I think gives us a great point of call. We've got critical mass in each of the sectors in which we operate, being office, industrial and retail. And the team -- the teams in place that we can actually scale up pretty quickly. And I think one thing that keeps coming out more and more is focus on ESG and sustainability from global investors and we certainly lead the market in that.

Second question just on FY '24 earnings, particularly as we think about cycling into FY '25. Can you just speak to or provide a bit more detail, please, first on the material base obviously to guidance this year and then how we should think about some of those more one-off type items that need to be cycled as we think about FY '25 earnings as well, please?

Sorry. I missed part of your question, Caleb, there about FY '25. Was it asking about the themes that are going to guidance? Was that the question?

Apologies, yes. It's more around the one-off impact. Just conscious there are a couple of [ make good ] and other sort of bank guarantees that there might be...

Yes, sure. Dion will pick that one up. Thanks, Caleb.

Yes. Thanks, Caleb. Look, in our guidance, we don't assume any of those one-offs, so they will cycle out going forward. Really the impact on FY '25 versus FY '24 there's a few swings and roundabouts, but it really does come down to interest expense averaging up a little higher over the course of the year, which is why FFO comes out a little lower. That is the main driving force going forward. There are no one-offs assumed in FY '25.

Yes. Okay. I guess my question was more around what we need to cycle now. What portion of FY '24 earnings were the sort of one-off items if there's a firm number you can provide?

Yes, the difference was $14.5 million. I think we've given the FY '23 number before. So it's circa $5 million of one-offs in FY '24.

[Operator Instructions] Your next question comes from Adam West from JPMorgan.

I've just got a quick question around your office incentives. It just looks like they've ticked down quite materially in the second half. I'm just wondering if you could chat through the leases and what was driving that.

Yes. Sure. Michael will pick that one up.

Yes. I mean, as we mentioned on the call, we did 44 leases across the year. So there's a variety of different incentive mechanisms across those. We did have some particularly positive leasing results on a couple of areas, which I can't really, for commercial confidence reasons, go into too much detail. But I would also add that we had positive net effective leasing spreads across our office leasing at 3% as well.

Your next question comes from Edward Day from MA Moelis Australia.

Sorry if I missed it earlier. Just wondering what your guidance assumes in terms of went up of the vacant space and your expiries in '25.

Sure. Dion, do you want to pick up that for guidance. Yes, thanks for the question, Ed.

Yes. Look, there's a variety of leasing to do. We have some vacancy and some leases to be addressed during the year. We've got various assumptions on those across the year. We're not forecasting a material difference to leasing and vacancy across the year, but it will move -- occupancy will move up and vacancy will move down slightly in our guidance.

I might add to that, Ed. We've only got 5% of new leasing to do on top of what's currently vacant as well. So if you look at what we -- our general run rate is much higher than that. So, yes, we're pretty confident on what we've got to get done over the 12 months.

And I think our skew for letups is skewed to the second half of the financial year for current vacant space as opposed to the first.

Yes, that's right.

So just with some of that vacant space, I think you mentioned you're making progress with Olympic Park. Could you maybe just put a little bit more color around that as to, I guess, how advanced those discussions are?

Yes, sure. I'd say we've sort of -- we've had to modify our strategy somewhat on Sydney Olympic Park over the last 12 months. We were pretty confident at the start of -- once we received that surrender payment of landing one of the large government requirements that unfortunately fell over. So we have now progressed a series of spec suites, which we're doing on the lower ground floor. I was out there last week. They're looking great and we're already getting some good momentum on those. And then we have a couple of groups that are looking at multiple floors as well. So they'll take a little bit longer to convert, but I'm reasonably confident that we'll be able to show some demonstrable change in the occupancy on that property in the short to medium term.

Just one more, if I may, on that [indiscernible] obviously, you reported really strong industrial metrics. What would be your expectations for an asset like that in terms of downtime assumptions, potential rent reversion?

I think sort of rent reversion on an asset like that would be not dissimilar to what we've seen in this year's leasing spreads. And really -- the inquiry in the market is still reasonably robust, particularly for assets of this caliber. So we don't go into the specific re-leasing spreads, given that it's one of the largest leases that we've got coming up. And if I give you too much detail on that it will be a bit too close to what we're trying to do. So I might just keep our powder dry on that, Ed.

There are no further questions at this time. I'll now hand back to Mr. Lees for closing remarks.

Well, thank you very much, everyone, for joining us on the call today, and we look forward to engaging with you further on this result over the coming weeks. So thank you very much.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.