Growthpoint Properties Australia (GOZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Growthpoint Properties Australia 1H '26 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Ross Lees, Chief Executive Officer and Managing Director. Please go ahead.

Good morning. My name is Ross Lees, Chief Executive Officer and Managing Director of Growthpoint Properties Australia, and I welcome you to the presentation of our half year '26 results. I would like to begin today by acknowledging the traditional owners of country throughout Australia and their enduring connections to land, sea and community. Today, we join you from the traditional land of the Wurundjeri people of the Kulin Nation, and we pay our respects to elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people joining us today. Presenting alongside me today is Nick Kost, our Head of Property, who has recently joined the executive team after leading the Growthpoint Property team for the last 5 years. I'm also joined in the room by Jacquee Jovanovski, our COO; 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. Our purpose, creating value beyond real estate anchors everything we do. We combine active management of high-quality Australian real estate with long-standing tenant and investor partnerships and disciplined capital management. Today, we manage $4.1 billion of directly held assets, which underpin our income-driven returns and $1.4 billion managed on behalf of wholesale and institutional investors. Our key strength is the capability and commitment of our team, the sector and disciplined specialists who are committed to delivering exceptional service through a partnership-led approach. Despite a challenging operating backdrop, underscored by continued geopolitical tensions, ongoing volatility and persistent uncertainty in the domestic interest rate environment, our teams remain disciplined and focused on executing our strategic priorities. Our leasing performance has been a standout. Strong leasing activity across the portfolio has supported occupancy at 95%. And pleasingly, our office portfolio is on track to deliver a record year of leasing volume. During the half, we strategically leveraged our balance sheet with gearing moving to 41.2% to support the creation of $125 million of new AUM and position the business for future growth. For 1H '26, Growthpoint delivered funds from operations of $0.122 per security. And reflecting our confidence in the outlook, we are updating our FY '26 FFO guidance to $0.23 to $0.236 per security from the previous range of $0.228 to $0.236 per security. In August last year, we identified our priorities mapped against our strategic pillars, and we've delivered measurable progress against each. During the half, we executed substantial leasing across our direct portfolio. In office, over 30,000 meters of leasing delivered increased occupancy of 94%, up from 92%. And this leasing activity has significantly derisked near-term expiries. In our direct industrial portfolio, we've also delivered substantial leasing to maintain high occupancy of 98%. In funds management, we expanded the Growthpoint Australia Logistics partnership and established Growthpoint Macquarie Park Trust, and we continue to progress sustainability initiatives, maintained high NABERS and GRESB ratings and investing in our people. Sustainable future-proofing is a key pillar in our strategy, incorporating climate, stakeholder satisfaction and governance. It is a defining feature of the Growthpoint business as we know this directly translates into higher tenant inquiry, occupancy and customer satisfaction and will drive returns over the long term. Having achieved our net zero target on 1 July, our NABERS Energy and Environment ratings increased during the half to 5.3 and 5.2 stars, respectively, and we maintained our high NABERS Water rating of 4.9 stars and GRESB score of 85. We also achieved 3 out of 4 of our sustainability-linked loan targets, resulting in margin discount. With our new CFO, Melinda Ch'ng commencing in March, I will cover the financials today. Over the half, we delivered funds from operations or FFO of $91.9 million, equating to $0.122 per security, an increase of 3.4% over the same period last year. This was driven by strong like-for-like property FFO of 5.9% with growth in office of 7% and industrial of 3%. This solid first half result is expected to normalize over the full year as lease expiries at 75 Dorcas Street and 100 Skyring Terrace flow through. Funds management revenue was $4.3 million for the half, with the decrease relative to the first half of '25 due to fewer acquisition fees received compared to the prior period. Net finance costs reduced relative to last year due to the impact of debt repaid from asset sales undertaken in FY '25, and we paid a distribution of $0.092 per security, in line with guidance and reflecting a 76% payout ratio. During the half, we negotiated $100 million of new bank facilities that are effective in January, providing liquidity for our 1H '27 maturities. During the period, we leveraged our balance sheet capacity to support fund establishment and closed the half with gearing at 41.2%. Our weighted average cost of debt has remained at 5%, and our debt was 78% hedged at 31 December. We anticipate a strong hedging position near 75% towards the end of FY '26 and above 50% through FY '27. We maintain significant buffers to our key banking covenants with our ICR currently at 3x relative to a covenant of 1.6x and an LVR of 44% relative to a covenant of 60%. We'll also continue to explore opportunities for strategic capital recycling, and we recently exchanged contracts on a $17 million divestment. I would now like to introduce Nick Kost to cover off on our portfolio of directly held high-quality assets.

Good morning, everyone. It's a pleasure to be joining you today. Our portfolio of office and industrial assets continue to underpin stable income-driven returns supported by proactive leasing and targeted CapEx. The portfolio is defined by a resilient and high-quality tenant base, which is weighted 46% towards listed businesses and 31% towards government entities. The portfolio has maintained high occupancy of 95% and with leasing completed to date, future lease expiries are well staggered. During the half, valuations stabilized or increased for over 68% of the portfolio. Capitalization rates were largely steady and market face rents increased by 1.6% for office and 2.1% for industrial. After CapEx and incentives, the value of the directly held office portfolio declined by 0.9% and the industrial portfolio increased marginally by 0.2%. Moving to Slide 13. We can see that the team's expertise in active management has translated to over 30,000 square meters of leasing completed across the office portfolio. This represents 7.7% of direct office income across 30 leasing transactions with an average term of 5.6 years. Of the leases completed, over half were with existing customers and almost 90% took the same amount of space or more. As a result, occupancy has lifted by 2% to 94% over the period, well above the market benchmark of 85%. Pleasingly, our strategy of targeted capital investment is delivering results as can be seen at 100 Melbourne Street, which is now fully let and 5 Murray Rose Avenue, which is 66% leased. With a further 30,000 square meters of executed leases or signed heads since 31 December, pro forma FY '26 expiries have reduced to 3% as at 31 Jan '26, and we are on track for record full year leasing across the office portfolio. The quality of our directly held industrial portfolio and proactive management has maintained high occupancy of 98%. In the first half of FY '26, we have leased in excess of 62,000 square meters of industrial space, equivalent to over 12% of direct industrial income across 6 leases with an average term of 4.9 years and have continued to deliver positive leasing spreads. With over 26,000 square meters of leases signed or under head since 31 December, vacancy and forward expiries are now 4% or less through to FY '29. And as a result, the industrial portfolio is positioned well to deliver income-driven returns into the medium term. On Slide 15, we are pleased to highlight our customer-centric approach, which has allowed us to support our customers as they grow, expand and change locations across both our office and industrial portfolios. During the half, we welcomed Panda Mart into the portfolio at Raglan Street, Preston on a 5-year lease term. We renewed Linfox at Lenore Drive, Erskine Park and Jaguar Land Rover at Melbourne Airport. We facilitated our existing customer IVE Group taking warehouse space in Perth and enabled EPEC Group to expand their office accommodation in South Brisbane. We will continue to proactively partner with our tenants to support their businesses and drive occupancy across the portfolio. I'll now hand back to Ross.

Thank you, Nick. Growing through funds management is a key pillar of our strategy. Through our funds management platform, we manage $1.4 billion in assets across 11 unlisted funds in our chosen sectors of office, industrial and retail and with an investor base of institutional partners and wholesale syndicates. Our in-house capabilities in origination, asset management and operations position us to scale in this part of the business. In the first half of '26, our focus was on delivering both new assets under management and facilitating fund exits as funds reach the end of their investment terms. During the period, we created $125 million of new AUM, adding to the $328 million created in FY '25. This included the expansion of the Growthpoint Australia Logistics partnership with a $24 million acquisition in Bundamba and establishing $101 million of Growthpoint Macquarie Park Trust to acquire an A-grade office asset in Sydney's largest metro market. We're committed to returning invested capital to our syndicate investors and capital partners, and we facilitated liquidity for investors with $140 million of AUM divested in the half and a further $173 million settled in January '26, in line with the investment terms of these funds. As we look forward in the funds management business, our focus is on leveraging our key points of difference. These include customer engagement, whereby leveraging our existing high-quality customer base across our directly held and managed portfolios, we have access to tenants to drive occupancy and market insights. Our capital position gives us the ability to meaningly co-invest alongside our investors and generate returns for Growthpoint security holders. And most importantly, our capability with a dedicated team specializing in our chosen asset classes spread across 3 offices, we have the ability to take a hands-on active approach to management. With a clear strategy and the ability to deliver tailored investment solutions, we're confident in the path ahead. Our strategy is consistent and clear: growth through fund partnerships underpinned by income-driven returns from our directly held high-quality real estate assets. Execution is guided by our strategic pillars to deliver portfolio performance, grow with like-minded partners, maintain efficient capital allocation through cycles and pursue sustainable future proofing for our stakeholders. As we look ahead, we are optimistic about the structural imbalance between supply and cost across our markets. The economic rents required to justify new development, particularly in the office sector, remain well above in-place rents, which is acting as a meaningful barrier to new supply. At the same time, we're seeing existing stock withdrawn for alternative uses, particularly living and data center conversions across a number of office markets. Together, these dynamics are expected to tighten vacancy rates over the medium term and create conditions that will support rental growth. In the near term, vacancy does remain elevated, and our focus is clear, which is continuing to deliver a high-quality product offering anchored by leading sustainability credentials and supported by a local team of sector specialists. This strategy has proven and has been central to maintaining high occupancy across our portfolio. From a capital markets perspective, rent is now driving growth and capitalization rates are largely stable. We expect an improvement -- continued improvement in office markets, while industrial, although normalizing from peak levels, continues to demonstrate resilient demand and strong income-driven returns. Our focus for the remainder of the FY '26 financial year is consistent with what was presented in August. Following significant derisking of upcoming expiries across the directly held portfolio, the team is focused on delivering record office leasing through active asset management and delivering for our customers. With 2 transactions completed in the half, we continue to pursue growth through additional funds management transactions focused on our core sectors, and we'll continue to manage funds approaching the end of their investment term. We intend to allocate capital to support co-investment in new funds, ensuring alignment with our unlisted fund investors and allowing Growthpoint security holders to benefit from the underlying fund performance. Our sustainability focus continues post net zero, and we are on track for mandatory climate reporting in FY '27. We are committed to our people who are key to our success, and we will continue investing in learning and development and supporting internal opportunity. Reflecting our first half leasing progress and visibility for the balance of the year, we've updated our FY '26 FFO guidance to $0.23 to $0.236 per security. First half '26 FFO is expected to exceed the second half due to lease expiry and fund expiries. I'd like to thank our team for their continued hard work. And I would also like to thank our tenants and our investors for their ongoing support. Thank you for your participation today, and I'd like to open to questions either online or via the call. In the first instance, please address any questions to myself. Thank you.

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

I guess my first question is just on the debt refinancing you did. Was there any margin impact of that $100 million refinancing? And then I guess just with the upcoming expiries, do you think there's any opportunity for potential margin compression there, just similar to a few of your peers?

Yes. Thanks for the question, Adam. So on the $100 million that we refinanced in the period, it was a shorter duration tenure of roughly 3 years. And we did see some margin compression relative to prior facilities on that. What we have coming up over the next 12 to 18 months, I think we're likely to see the trade-off between some margin compression coming through from tightening credit spreads and then there's obviously a higher swap curve coming through on the other side of that. So I think it's very fair to say margin compression feels like between 10 and 20 basis points over the last 12 months.

Yes, yes. No, that's clear. And I guess just one on the office portfolio, but it was a good result with the, I guess, like-for-like property growth. I'm just wondering how is progress going, I guess, on leasing up the remainder of the properties that are offline at the moment?

I might pass to Nick to talk to our current vacancies and just provide some color on those lease-ups, if you want to take that one, Nick.

Yes, sure. Thanks, Adam. Look, Adam, most of our office vacancies are really focused in a handful of assets in Victoria, Queensland and New South Wales. And obviously, I can't go into too much detail at the moment, but we are actively working on those at the moment. We have some good progress, some good interest that hopefully we'll be able to share in the near term.

I think the key thing we're seeing as well, Adam, is where we've been focused on, and this was the same in the last half, delivering some capital into those vacancies and providing a turnkey solution is materializing into a much better leasing demand.

Yes. No, that's clear. And I guess just a final one for me on the capital management front. But I guess just given the industrial portfolio is quite high occupancy and you guys achieving good spreads, is there an opportunity to sell down that portfolio to third-party capital similar to what you did for GALP, potentially decreasing gearing? And then if so, at what level would you potentially consider a buyback at?

Yes, a few questions on that one. So the GALP portfolio was a successful transaction for us last year. It really allowed us to maintain an exposure to those particular assets where undertaking a level of deleveraging and helping with our growth alternatives in funds. Whether it's the office or industrial portfolio, we're continually looking at our capital allocation there on how we want to think about leveraging our overall balance sheet. So we don't have any immediate plans for a second tranche sell-down, if you like. And we do balance off the overall sector weightings between logistics and office across the portfolio. So currently, we sit at roughly a 1/3, 2/3 split between those 2 sectors. We're mindful of -- we do believe that the Growthpoint investors do enjoy that industrial exposure. So bringing that down further is something that we do balance off. As it goes to then in doing something deleveraging to undertake a buyback, that's -- you can always evaluate it, but not an immediate priority.

[Operator Instructions] Your next question comes from Elizabeth Andre with Macquarie.

My first question is around guidance. The second half is implied at around between $0.108 to $0.114 per share, which is around a 5% range. I was hoping you could call out the key swing factors into the second half.

Yes, sure. Thanks for the question, Elizabeth. I think probably a couple of pieces. Looking at the first half to second half skew, we had some lease-up come through from leasing in FY '25 that contributed in the first half. As we come to the second half, we've got 2 key lease expiries. One was 100 Skyring Terrace for roughly 6,000 meters at the end of January. And then we've got 11,000 meter expiry coming up in March in 75 Dorcas Street down here in Melbourne. And that's really the key driver of that first half, second half skew. Insofar as the variability to the range in the second half, we do have some vacancy in the portfolio, 1.7% in industrial, 5-ish percent in office that there's still the potential for some leasing to go other way on those particular vacancies as we come through the second half and then also variability around possible acquisition fees or otherwise in the funds management business.

And I guess looking into FY '27, what percentage of expiry is known to be leaving or what percentage is expected to be renewed?

So as we come into FY '27, I think our lease expiry chart shows about a 14% lease expiry in FY '27 in the material. We've tried to provide some extra color through the pack in the Office segment and the Industrial segment as to where we've received terms on those particular vacancies. I think primarily the key vacancy that we know will be coming is in the second half of FY '27 in Queensland with about 8,000 to 9,000 square meters coming out of 100 Skyring Terrace in the second half. And then also at 100 Melbourne Street, we've got about another 5,000 coming out there also in the second half. So definitely, the 2 key ones that we know to be coming back to us and then the others are in active negotiations.

Great. Maybe just a final one for me. Are you able to disclose what incentives were for office and industrial in the period and your expectation around [ MC&TI ] into the second half and then maybe also into FY '27?

Sorry, I missed the second part of your question there, Elizabeth. It was asking what incentives were in the first half. What was the second part of your question?

Just around MC&TI in the second half and also '27.

Yes. So for incentives for the first half, they're pretty comparable to where we finished up for FY '25. So in the office sector, our average incentive was 32% that compared with 31% for full year '25. In the industrial sector, [ reflected ] was approximately 20% in industrial for the first half. We see those numbers being fairly consistent into the second half, and that's clear with the expectations with where we were last year as well.

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

Well, thank you, everyone, for your participation today. We look forward to coming to see you all over the next couple of weeks. Thank you.

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