Growthpoint Properties Australia (GOZ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Growthpoint Properties Australia FY '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 full year 2026 financial results. I would like to begin by acknowledging the traditional owners of country throughout Australia and their enduring connections to land, sea and community. Today, we 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 online today. Presenting with me today is Melinda Ch’ng, who joined as our Chief Financial Officer during the year; and Nick Kost, who was promoted to Group Executive Head of Property in the first half. I'm also joined in the room by Jacqee Jovanovski, our Chief Operating Officer; and Alix Holston, our Head of Corporate Affairs and Investor Relations. I'll begin the presentation today with an overview of FY '26 and our strategic highlights before handing to Melinda for the financial results and Nick for an update on the Direct portfolio. I'll then return to discuss funds management and our priorities for FY '27. Before we move to the results, I'd like to provide a short overview of Growthpoint today. Our purpose, creating value beyond real estate continues to guide our approach to delivering sustainable value for security holders. Today, we manage approximately $5.2 billion of assets under management across 64 assets, comprising $4 billion of directly held office and industrial assets and $1.2 billion managed on behalf of third-party wholesale and institutional investors. Our key strength is the capability and dedication of our team as sector and disciplined specialists who are committed to delivering exceptional services -- service through a partnership-led approach. FY '26 was a year of disciplined execution against a challenging and increasingly volatile macroeconomic backdrop. We entered FY '26 optimistic for an improved operating environment following interest rate cuts and growing confidence in capital markets. However, geopolitical uncertainty and inflationary pressures influenced the second half, resulting in rising interest rates and a more cautious investment environment. Despite these conditions, active management of our portfolio delivered record office leasing volumes, increasing portfolio occupancy to 96% and a weighted average lease expiry of 6.1 years. We also continue to pursue new opportunities in funds management with $125 million of new AUM created. This operational execution supported the delivery of funds from operations of $0.235 per security, near the top end of our guidance range and above FY '25. In August last year, we outlined a clear set of priorities aligned to our strategic pillars, and we delivered measurable progress against each. Our focus on leasing and customer relationships delivered record office leasing of more than 81,000 square meters and almost 118,000 square meters of industrial leasing, which resulted in an overall increase of portfolio occupancy to 94%. In Funds Management, we expanded the Growthpoint Australia Logistics partnership, established the Growthpoint Macquarie Park Trust and delivered liquidity to fund investors. During the year, we refinanced $495 million of debt and now have liquidity available to cover all FY '27 debt maturities. We progressed asset recycling initiatives, including the sale of the Woolworths Perth distribution center announced post year-end. And from a sustainability perspective, we achieved our net zero target and improved and maintained strong environmental ratings as well as strengthening our leadership team. Sustainable future-proofing is a key pillar in our strategy, incorporating climate, stakeholder satisfaction and governance. It's a defining feature for 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. During FY '26, we achieved our net zero target, maintained a GRESB score of 85 and further improved our NABERS energy, water and indoor environment ratings. We achieved 3 out of 4 performance targets for our sustainability-linked loans, achieving a margin discount. And we increased our employee engagement score to 76%, 5 percentage points above the industry benchmark, and our tenant customer satisfaction score remained strong at 77%. We also completed Phase 1 of our Yardi ERP implementation, supporting future scalability and operational efficiency. I'll now hand over to Melinda to take you through the financial results in more detail.

Thank you, Ross. FY '26 was a year where strong operational execution translated into earnings growth despite a higher for longer interest rate environment. FFO increased 0.9% to $177.6 million or $0.235 per security, finishing near the top end of our guidance range. The key driver was property FFO growth of 1.8%, supported by strong leasing outcomes across both office and industrial portfolios, resulting in like-for-like property growth of 2.6%. This operational performance largely offset two headwinds. First, funds management revenue was lower than FY '25, which benefited from higher acquisition fee income; and second, net finance costs increased due to the progressive increase in cash rate in the second half. We maintained distributions at $0.184 per security with a payout ratio of 78.2% within our target range of 75% to 85%. Capital recycling remains a key component of our strategy. Since FY '24, we have completed or announced approximately $637 million of divestments. These transactions have enhanced portfolio quality, generated liquidity and supported balance sheet flexibility. Divestments have significantly exceeded reinvestment over the period, demonstrating our disciplined approach to capital allocation. We have selectively reinvested through our funds management platform, including co-investments alongside capital partners, creating new assets under management while maintaining a capital-efficient growth profile. We will continue to take a disciplined approach to capital allocation and recycling to support long-term security holder value. Turning to capital management. Our focus during FY '26 was on extending debt maturities, maintaining liquidity and preserving balance sheet flexibility. During the year, we secured $275 million of new bank facilities and extended $220 million of existing facilities with 15 basis points improved margin, leaving us with sufficient liquidity to cover all FY '27 debt maturities. Gearing closed at 41.6% within our target range, reflecting our co-investment alongside capital partners in the Macquarie Park Trust and our continued investment in growing the funds management platform. Importantly, we continue to maintain substantial headroom to all banking covenants. As lower cost hedges matured and cash rates remained elevated, our weighted average cost of debt rose modestly from 5% to 5.1%. We have commenced the FY '27 year with 77% of debt hedged and expect to remain above 60% hedged at the end of FY '27, even without entering into any additional hedges. Finally, our recently announced $268 million Perth divestment is an example of our capital recycling program and is expected to reduce gearing by around 4 percentage points during -- following completion. Turning to valuations. Portfolio values were broadly stable during FY '26. While valuers adopted modestly higher cap rates, this was largely offset by strong leasing outcomes, higher occupancy and rental growth. As a result, office values declined only 1.9% and industrial value 0.9%. This demonstrates the resilience of the portfolio's income profile. I would now like to pass to Nick Cost to cover off on our portfolio of directly held high-quality assets.

Thank you, Melinda. Good morning, everyone. It's a pleasure to join you today. Our directly held office and industrial assets continue to provide resilient income-driven returns supported by proactive management, strong leasing activity and targeted CapEx. The portfolio benefits from a high-caliber tenant profile with almost 70% of the portfolio's income derived from listed companies and government tenants. With strong leasing performance in FY '26, the portfolio ended the year with an occupancy of 96% and future expiries well staggered into the medium term. Moving to Slide 14. The team's efforts and asset management expertise is clear. In FY '26, we achieved record office leasing, which was an outstanding result, particularly considering the challenging macroeconomic environment. Across the direct office portfolio, these leasing results include a take-up of 81,000 square meters of space across 48 transactions with an average lease term of 7.5 years, representing 22% of the office portfolio's income. This leasing success has increased office occupancy by 3% to 95%, well above the market average of 83%. We are also pleased that our hands-on customer-focused approach is resulting in high levels of satisfaction across the portfolio. In our FY '26 tenant survey, Growthpoint achieved a landlord satisfaction rating of 8.2 out of 10, above the industry benchmark of 7.2. Our commitment to partnering with new and existing tenants and our focus on delivering attractive workplaces is resulting in strong leasing outcomes. During the year, we worked with a number of our existing tenants to renew or relocate them within the portfolio. We were pleased to renew Samsung across 13,000 square meters at 3 Murray Rose Avenue, Sydney Olympic Park. We renewed Monash University across 7,000 square meters at Wellington Road Mulgrave and worked closely with EPC Group relocating them within our South Brisbane portfolio, doubling their tenancy footprint to just over 3,000 square meters. We also welcomed new high-caliber tenants into the portfolio, including Myer Group, who relocated their national head office from the Docklands to 75 Dorcas Street, South Melbourne. We facilitated Compass Education's move to 109 Burwood Road, Hawthorn and welcomed El Jannah to 5 Murray Rose Avenue, Sydney Olympic Park. Throughout FY '26, 69% of office leasing transactions completed were with existing portfolio customers, demonstrating the value of Growthpoint's customer-centric approach. Pleasingly, our high-quality industrial portfolio also continues to perform well. During FY '26, we completed almost 118,000 square meters of leasing across 11 transactions equivalent to 24% of the industrial portfolio's income. These transactions had an average lease term of 4.7 years, delivering an average leasing spread of 34.6% -- this leasing activity ensured that the portfolio has continued to maintain strong occupancy of 98%. And whilst the WALE has reduced marginally from 5.8 to 5.6 years, the activity throughout the year has significantly derisked the portfolio with vacancies and future expiries now sitting at 4% or less per annum over the next 3 years. As with the office portfolio, our customer-centric approach continues to deliver positive outcomes across the industrial portfolio. During the year, we welcomed Qantas into an 11,000 square meter warehouse at Perth Airport and Pandamart into a 13,000 square meter tenancy at Ragland Street, Preston. We renewed existing customers, Workwear Group and Jaguar Land Rover at Melbourne Airport and Linfox at Lenore Drive Erskine Park. We also facilitated our existing customer, IVE Group, taking new warehouse space in Perth. The leasing outcomes achieved this year across both our office and industrial portfolios has demonstrated an ongoing demand for high-quality, well-located assets. We were pleased to work with existing customers to extend our relationships and welcome new high-caliber customers into the portfolio. I'll now hand back to Ross.

Thank you, Nick. Growth through funds management remains a key pillar of our strategy. At the 30th of June through our funds management platform, we managed approximately $1.2 billion of assets on behalf of institutional and wholesale investors across 9 unlisted funds. The platform is diversified across the office, industrial and retail sectors where we are able to leverage the same property leasing and asset management expertise that supports our directly held portfolio. Our ability to source opportunities, actively manage assets and co-invest alongside our partners remains a key competitive advantage. And we continue to see funds management as a meaningful lever for capital-efficient growth as market conditions improve. In FY '26, our focus is on delivering both new assets under management and facilitating fund exits as funds reach the end of their investment terms. During the year, we created approximately $125 million of new AUM, adding to the $328 million that was created in FY '25 despite elevated market volatility and softer transaction activity. This included expanding the Growthpoint Australia Logistics partnership with a $24 million industrial acquisition and establishing the $101 million Growthpoint Macquarie Park Trust to acquire an A-grade office asset in Sydney's largest near city market. We're committed to returning investor capital to our syndicate investors and capital partners and facilitating liquidity for investors in line with investment terms with $331 million of divestments. We continue to be active in market with a clear strategy focused on investing in our specialist sectors, targeting assets between $50 million and $250 million and partnering with both institutional and wholesale syndicate investors. Whilst growth has been more measured in the current environment, we continue to see funds management as a long-term opportunity for Growthpoint, and we will succeed by leveraging our key points of difference, include our customer engagement, our capital position and most importantly, our capability. Our strategy is consistent and clear: grow through funds 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 an 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 demand, supply and cost across our markets. Employment growth remains a structural tailwind for demand, while future supply across many of our markets is expected to remain constrained. 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 the creation of 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 support conditions that support rental growth. In the near term, market-wide office vacancy does remain elevated and industrial vacancy has increased for FY '26. However, it does remain below long-term averages. The leasing that we have completed in FY '26 to create a significantly reduced near-term expiry profile positions Growthpoint well against this backdrop. A key topic receiving increasing attention is the potential impact of AI on office demand. Whilst we continue to assess the implications of AI, around 85% of our income is derived from head office and government or public service tenancies, which we believe provides insulation from major AI disruption. Consistent with this, our tenant survey recently found that 63% of our tenants expect to require the same or more space as a result of AI, while only a small proportion anticipate requiring less. Further, our exposure to the industries most expecting downsizing, namely financial and professional services and IT is only 11% of our portfolio exposure. We have historically achieved above-market occupancy and we'll seek to maintain this by continuing to deliver attractive workplaces that meet tenant demands into the future. Our strategic priorities for FY '27 and beyond build on the strong base we've established, driving portfolio performance to support income-driven returns and growing our funds management business. We will maintain our leasing focus with a particular focus across our funds management assets and our Queensland direct office portfolio. We'll continue to seek new partnerships across office, industrial and retail and deliver liquidity for investors in funds nearing the end of their investment terms. Disciplined balance sheet management will support future fund growth as we allocate capital to support new co-investment in funds, ensuring alignment with our unlisted fund investors and allowing Growthpoint security holders to benefit from the underlying fund performance. Our sustainability focus continues, and we're on track to deliver our first mandatory climate report in FY '27. And finally, we'll keep investing in our people and systems to support the business as it grows. We are well placed to navigate the ongoing macroeconomic volatility and high interest rate environment as we enter FY '27 with high occupancy, significantly reduced lease expiry profile and available liquidity to cover all FY '27 maturities. We're providing FY '27 FFO guidance of $0.226 to $0.235 per security, which reflects the impact of ongoing elevated interest rate on earnings. FY '27 distribution guidance is $0.184 per security. Over the past 2 years, the Board and management have taken a disciplined approach to the management of debt. In FY '27, we're continuing this focus by undertaking a review of our capital management plan to ensure ongoing balance sheet flexibility to execute our strategy. This includes the consideration of distribution reinvestment plan for FY '27 distributions and a review of the target distribution payout ratio to apply in future years. Capital recycling will continue to play an important role in supporting our capital management objectives. I'd like to thank our team for their dedication and contribution to our performance in FY '26. And I would also like to thank our tenants, suppliers and other key stakeholders for their continued support. Thank you for your participation today. And I would like to open to questions either online or via the call. If you can please direct questions to me in the first instance. Thank you.

[Operator Instructions] Your first question comes from Howard Penny from Citi.

Just my first question is just around lease expiry FY '27 and FY '28. As you said, it's been derisked very well, but there's still 8% in FY '27 and 5% in FY '28. Could you give us any insight into those expiries and potential strategies for those as far as possible?

Yes. Thanks for the question, Howard. I'll pass over to Nick. As you point out, we've got 8% in FY '26. A lot of that is at the back end of the financial year, but Nick will talk through what the major exposures are there.

Thanks, Howard. FY '27, majority of that expiry profile sits in the office portfolio. As we sit today, pleasingly, we've addressed 45% of that unsecured income in FY '27, and that's across 3 of our large lease expiries, office building in Perth and 2 of our larger industrial buildings. In addition to that 45%, we've got about 19%, which is well progressed under heads of agreement. So as we stand today, we're at sort of 64% of that unsecured FY '27 income well progressed. So continuing to focus on that, obviously, but we've got a good start at this stage.

I think the major ones we've got coming through at the back end there Howard, is at 100 Skyring Terrace and Green Square Close, where we've got about 12,000 to 13,000 meters of office expiry coming through in the last 4 months of the financial year.

Great. And the leasing has been very strong in this last period. Is there any insight you can give us into the type of incentives or how those negotiations have been going to achieve those strong results?

Yes. I think the lease incentives, Howard, we've disclosed in the presentation, we had an average incentive during the year of about 31% on gross rents in the office space. I think the general theme that we've seen, which has been pleasing in some of the inquiries, particularly at the large end, is probably the upsizing inquiries through the negotiation. And when I say that, that's the upsizing of space. So I think what we're finding is on the journey where the tenants floor spaces are starting out and where they're finishing is tending to increase over that negotiation period.

And the last question from me is just one last question, just on funds under management appetite. It's been a tricky time for investment markets generally. But are you seeing any areas of investor -- specific investor demand across your options?

Yes. I think we're pretty optimistic. At this time last year, Howard, as we are coming into a rate-cutting environment. And then as we started the back half of the financial year from February onwards with the combination of interest rates moving in a different direction and geopolitical uncertainty from the Middle East certainly weighed on investor confidence for decision-making. We're continuing to evaluate opportunities across the 3 sectors being office, industrial and retail, we're probably finding some reemergence of demand from institutional investors on the office side. And we're working across opportunities in retail and industrial with wholesale investors as well.

Thank you Ross and team and congrats on the results.

Your next question comes from Callum Bramah from Macquarie.

I was hoping you could just give us a little bit of a better understanding of the guidance range. I think it's about a 4% guidance range. Can you just give me an idea of things that are likely to drive you towards the top of that or where you see some risk, I guess, given that on that basis, you seem to have addressed or derisked a lot of the expiry in office?

Yes. Thanks, Callum. I'll start and Melinda might jump in as we go. But we've got a range there that's a 0.9 cent range. And really for the moving parts we've got during this year, there is still leasing to undertake, particularly across the office portfolio, and there's various outcomes that can be driven there that put us towards either end of that range. Additionally, there's opportunities within the funds management side of the business. Within our guidance, we've assumed levels that are similar to FY '25. And either outperformance or underperformance of that can have impacts on the guidance range as well. So they're probably the key moving parts as to where we go. I don't think you have anything to add there, Melinda?

Just probably on the rate side, we're expecting them to come in broadly in line with today's 3-month bank bill swap. So yes, hoping that it stays around that point.

Okay. And so just to clarify, when you said about Ross, what you said about funds, so you're assuming that you do get a little bit of growth in this year in new FUM or AUM growth? And is that via winning new FUM or it's just revaluations?

That's through creation of new products, Callum.

And then maybe could you just elaborate a little bit more? I did -- I heard your comment about the DRP and payout ratio, and I read it in the annual report. Can you just give us a little bit of an idea of how you're thinking about what the appropriate payout ratio might be and how far you would take it, I guess? And then also when you'll be in a position maybe to make the decision on the DRP because it's not currently in place, is it?