The GPT Group (GPT) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to GPT 2023 Annual Results Briefing. [Operator Instructions] I would now like to turn the conference over to Mr. Bob Johnston, CEO and Managing Director. Please go ahead.

Good morning, everyone, and welcome to GPT's 2023 annual results briefing. Joining me for today's presentation are: Dean McGuire, our Group Interim CFO; Chris Barnett, Head of Retail; Martin Ritchie, Head of Office; and Chris Davis, Head of Logistics. I would like to start by acknowledging the traditional custodians of the lands on which our business and assets operate. I pay my respects to Elders past, present and emerging and to any First Nations people that have joined the briefing. I'm pleased to report that we have delivered results for the year in line with guidance provided at the beginning of the period. FFO per security for the full year was [ $0.3137 ], down 3.2% on the prior year. The lower FFO result was primarily driven by the increase in interest costs for the group and for our 2 wholesale funds in which GPT has a material co-investment. Distributions for the full year were $0.25 per security. Following revaluations at year-end, NTA declined 6.2% to $5.61. I'll speak to valuations in a few moments, but the biggest decline was for our Office portfolio with valuations down 9.2% over the year. Portfolio occupancy at year-end was 98.2%, supported by high occupancy for both the Retail and Logistics portfolios, which continue to benefit from favorable trading conditions, including the new QuadReal Student Accommodation mandate we secured in Q4 last year. Assets under management increased to $32.6 billion at year-end despite the valuation declines. Turning now to an overview of operations for the year. Our retail platform has delivered excellent results. Our assets are highly productive, and we continue to see positive demand from retailers. Portfolio occupancy at year-end was 99.8% and leasing spreads averaged 5.3%. Melbourne Central has delivered strong results for the year and is now fully leased following a few years of COVID impact. As expected, retail sales growth moderated in the second half of the year, but were up 7.4% year-on-year, reflecting the quality of our portfolio. The office sector remains challenging. Despite the subdued leasing demand in a competitive market, 134,000 square meters of leasing was achieved, taking portfolio occupancy to 92.3% at year-end, including Heads of Agreements. Our tailored products and strong sustainability credentials have been key to securing the leasing volumes we have during the year. Our Logistics portfolio once again delivered strong results. Ongoing tenant demand and low vacancy in each of the key markets is driving rents higher and we are capturing this through leasing spreads and our development completions. Occupancy for the Logistics portfolio was 99.5% at year-end, and there were 5 development completions during the year, adding over 111,000 square meters of prime grade assets. Expanding our Funds Management platform has been a focus for the group. As you can see from the chart on the bottom right of this slide, there has been a material step-up since 2020. Last year, we were appointed [ an ] investment manager for QuadReal's 5,000 bed Student Accommodation portfolio, and I'm pleased to advise that we were recently selected by the Commonwealth Superannuation Corporation as investment manager from a mandate which includes 101 Collins Street in Melbourne, 50% of the QV1 office building in Perth, and 50% of the Indooroopilly Shopping Centre in Brisbane. The transition of management to GPT is expected to be completed in the second quarter of this year. With asset valuations declining, we continue to maintain a disciplined approach to capital management. At year-end, the group's balance sheet gearing was approximately 28%. We have modest debt maturities over the next 2 years, and we are currently holding high levels of liquidity. GPT retains a strong commitment to being a leader in sustainability. All owned and managed office and retail assets are now operating carbon neutral with independent certification to be complete by the end of this year. Turning now to valuations on Slide 6. All our assets were independently revalued at 31 December. This resulted in a decline in the portfolio valuation of 5.1% or $819 million over the full year. As I mentioned earlier, this was largely driven by the Office portfolio with a valuation decline of 9.2% and cap rates expanding 46 basis points to 5.49%. Investment metrics for retail softened a similar amount. However, this was partially offset by increases in market rents, leading to a valuation decline of 3.1%. For our Logistics portfolio, cap rates expanded 86 basis points to 5.26%, and discount rates increased by just over 100 basis points. However, strong growth in market rents has offset the softening of investment metrics, with the Logistics portfolio valuation down 1.9%. As you know, there has been limited transaction evidence in 2023 for [ valuers ] to rely on. However, with confidence emerging that the interest rate hiking cycle may have peaked, I expect that we will see more transaction activity emerge over the next 6 to 12 months, providing greater market evidence for [ valuers ]. With that, I'd now like to hand over to Dean to provide more detail on the financial results.

Thank you, Bob, and good morning, everyone. I'll commence on Slide 8 with the financial results for the year. The statutory loss of $240 million is driven predominantly by property devaluations of $819 million, as Bob has just discussed. FFO is in line with guidance at $600.9 million, down 3.2% on 2022, driven primarily by higher interest expense, given the significant increase in our cost of debt over the period. AFFO is 4.5% lower than the prior year, with maintenance and leasing CapEx slightly above 2022 levels. We expect leasing CapEx to grow in future periods as higher market incentives flow through office leasing transactions. Distribution per security is $0.25, in line with guidance and representing a payout ratio of 96% of free cash flow. Moving now to Slide 9, the segment result. Retail portfolio income grew 9.6% to deliver $317.5 million in FFO. Strong growth in retail earnings was led by Melbourne Central's continued recovery. Across the retail portfolio, comparable income growth of 12.5% was driven by positive leasing spreads, fixed rental increases and increase in turnover rent and reduced downtime. Office portfolio income fell 3.1% to $283.9 million due to the reduction in average occupancy across the year and higher interest expense in GWOF, partially offset by fixed rental increases. The Logistics portfolio continues to perform well, supported by high occupancy, strong leasing spreads and fixed rental [ reviews ]. Logistics income was up 5.1% to $195.8 million with the contribution from development completions broadly offsetting the impact of divestments throughout the year. The addition of the UniSuper and ACRT mandates for the full year, along with the continued growth in the QuadReal partnership has driven a strong increase in our Funds Management earnings, up 14.3% to $65.6 million. Finance costs increased materially to $193 million, up $53 million on the prior year as a result of an increase in the cost of debt to 4.7%. During the year, we continued to exercise prudent cost control with corporate costs growing modestly by 1% to $58.2 million. As a result of the strong growth in Funds Management earnings, tax expense grew $2.3 million. Turning now to Slide 10 on the group's hedge position and projected cost of debt. The group maintained high hedging levels throughout 2023, and this continues into 2024 with our interest rate exposure 96% hedged over the next 12 months. Margins have remained stable throughout the year, and our all-in cost of debt is forecast at 5.2% for 2024. Over the next 3 years, we are hedged 71% on average at a fixed base rate of 3.5%, providing protection against further interest rate volatility. Turning to capital management on Slide 11. NTA has decreased to $5.61 per security due to portfolio devaluations. Net gearing is 28.3% at balance date, in the lower half of our stated management range of 25% to 35%, providing significant headroom to lender covenants of 50%. Gearing has remained stable over the year with approximately $500 million of divestment proceeds offsetting the impact of development expenditure and devaluations. We continue to take a disciplined approach to capital management, conscious of the uncertain outlook for valuations and the increased cost of capital. The group retains liquidity of $1.5 billion, which funds commitments and debt refinancing through to mid-2026. Our balance sheet remains strong with credit ratings of A minus from S&P and A2 from Moody's, within our target A space range. I'll now pass to Chris Barnett for an update on our retail business.

Thank you, Dean, and good morning, everyone. I'd now like to take you through the results of our retail business, which has continued to perform strongly throughout '23. Our financial results for the year delivered comparable income growth of 12.5%, predominantly as a result of the exceptional performance of our leasing team and the recovery of Melbourne Central. Total centre sales grew 7.4% for the year, which has driven our specialty productivity to over $12,800 per square meter. We've been able to achieve excellent leasing results by completing a record number of deals, improving our portfolio occupancy to 99.8%. Our centres have performed brilliantly throughout the year, and all of our assets are in great shape heading into '24. Now turning to Slide 14, where our leasing teams have ended the year with considerable success. There's been strong retailer demand for quality assets, resulting in positive leasing spreads of 5.3% on all deals completed. The team has been able to conclude a record 678 deals for the period, which has positioned our assets with high centre occupancy. For those deals completed during the year, all were structured with fixed base rents and annual increases averaging 4.8% and our lease terms have extended to now average 5.2 years. Turning to retail sales on Slide 15, where our centres outperformed last year growing at 7.4%, and our total specialty sales were up 6.1%. The graph on the left of the slide shows that supermarkets continue to grow strongly, up 9.5% for the year, and it's pleasing to see cinemas return to positive sales comps, up 3%. When comparing our specialty category sales to last year, health and beauty, dining, services, fresh food and technology, all continued to grow strongly. Whilst our fashion category is relatively flat for the year, the strong performances of Unisex, up 3% and fashion accessories, up over 10%, reinforces a shift towards more relaxed casual attire. Black Friday has evolved into a major sales event within the Australian market. Our assets reported strong sales in November, up 5.6% on the prior year, and our research informs us that these sales are not being generated at the expense of December Christmas trade. Now turning to Slide 16, where I wanted to provide an update on Melbourne Central, which continued its remarkable recovery throughout the year. The centre's turnover grew 17.1% on the prior year, and its MAT has now achieved record levels. Total specialty MAT is just under $16,000 per square meter, and the majority of our specialty categories achieved double-digit growth on '22. There is strong tenant demand for the asset, and with the centre being fully leased, we've been able to achieve an average positive leasing spread of 5% on the 92 deals completed throughout the year. The centre's market share and customer penetration data shows that the number of visits per customer are at record levels. While the office workers have not fully returned to the CBD, it is clear that our Victorian shoppers have embraced the importance of a vibrant city centre. Our outlook for the centre remains extremely positive. Now turning to Slide 17, where our retail platform has grown over the past few years to now include 16 assets with over 1.3 million square meters of gross level area. Last year, our assets welcomed over 200 million visitors, and we have a strategic focus to ensure that their experience whilst at our assets drive higher levels of customer advocacy. GPT's managed assets achieved an average Net Promoter Score of 72. This result is exceptionally high and a testament to our focus of listening to what our customers want and putting their experience first. In November last year, we launched our [ RxConnect ] program, where for the first time we will get a 360-degree view from [ their ] CEOs through to their centre-based team members of how our retail partners interact with and experience GPT's retail platform. Finally, on Slide 18, where our outlook for 2024 remains positive. Over the past 2 years, our centre MAT sales have grown by over 40%. And whilst we expect sales to continue to grow throughout '24, this growth will be at more normalized levels. Low levels of unemployment and above average population growth will provide a solid foundation for future sales. Our retailers are currently in great shape, having enjoyed strong sales growth whilst diligently managing their margins and profitability. With our centres at high occupancy and with the supply of new retail floor space being forecast at historic [ lows ], our view is that leasing demand for quality assets will remain positive throughout '24. We will continue our leasing focus to strategically drive centre sales productivity as we align customers' [ on-trend ] desires with the most relevant tenancy mix. Our assets are in great shape, and our portfolio is well positioned for future growth. I'll now hand you to Martin Ritchie for the Office update.

Thank you, Chris, and good morning, everyone. Office comparable income declined by 0.8% due to portfolio vacancy, whilst the segment contribution is down 3.4% due to increased GWOF interest costs and reduced Funds Management fees as office assets under management reduced by 5.6% from $14.7 billion to $13.9 billion due to valuation declines. Leasing was the key focus for the portfolio, and we delivered a strong result with occupancy increasing from 88.5% to 92.3%, including Heads of Agreement. Now turning to Slide 21. The office leasing market remains challenging. Vacancy rates and incentives remain elevated in Sydney and Melbourne, whilst face rents have increased over the last 12 months. Brisbane was a standout performer. Over the year, prime vacancy fell from 14.7% to 9.8%. Prime rent growth was strong and incentives reduced by 164 basis points. Worker activity in the Sydney and Melbourne CBD has increased and more companies are mandating a minimum return to the office, generally for 3 days a week, and some are linking bonus and performance reviews to office attendance. We anticipate this will support further leasing activity in 2024. Moving to our leasing on Slide 22. The team produced a strong result of 134,000 square meters, including Heads of Agreement, which equates to approximately 15% of the portfolio. Of the deals done, 2/3 were for space over 1,000 square meters. The average lease term was 5.1 years and incentives averaged 35% of gross rent. The key deals on the slide demonstrate both the high-quality brands we have as customers and the longer tenure of these deals, which averages 6.7 years. Pleasingly, we had a net increase of 59 new customers, which equates to 13% more than the prior year, which diversifies our income stream and future leasing risk. At the beginning of the year, vacancy in 2023 expiry equated to approximately 15% of portfolio NLA. We sold over half of this, improving occupancy to well above the market average, as shown on the chart on the left. Looking now to this year, leasing will again be the core focus of the team to address the current vacancy of 8% and 2024 expiry of 11%, as shown on the chart on the right. The expiry is skewed to the first half of the year. 7% of the expiry is known to be vacating, and includes the CBA mid-rise space at Darling Park and Allianz at Melbourne Central Tower. Refurbishment works are underway on the CBA space and will commence on the Allianz space in quarter 2. We will need to lease a similar amount of vacant and expiring space, as we did last year, to maintain the portfolio occupancy at the current level. Moving to Slide 24. Our portfolio was well positioned for leasing success in the year ahead. Customer experience is at the heart of our strategy and our high NPS score of 73 reflects that our strategies have traction. We have a high-quality portfolio with 78% of it constructed or refurbished since 2012. Our 3 distinct Office products of Traditional Space, GPT DesignSuites and GPT Space&Co., maximize our appeal to a broad range of customers. We continue to prioritize sustainability, and I'm pleased to confirm that 100% of the portfolio is now certified carbon neutral. This, coupled with our strong NABERS credentials, is increasingly required by our customers. We head into 2024 with good levels of customer inquiry and leasing negotiations already underway. Finally, on Office outlook. The leasing market will continue to be challenging in the 2 main markets of Sydney and Melbourne. We expect customer demand to favor the better quality assets with high levels of amenity like ours. Our 3 distinct space products continue to resonate with customers, giving them a choice and the opportunity to adapt their space requirements with us to suit their evolving needs. With our high-quality portfolio and relentless focus on leasing, we expect to maintain portfolio income at current levels for the upcoming year. I will now pass to Chris Davis to present the Logistics results.

Thank you, Martin, and good morning. The Logistics business has delivered strong results for the full year, contributing $198.5 million, up over 5% on 2022. We're driving performance from operating portfolio with comparable income growth of 5.5% as a result of strong leasing spreads, [ structure ] increases and high occupancy of 99.5%. During the year, we divested 5 older assets and reinvested in the portfolio with the completion of 5 new developments. Assets under management now totals $4.7 billion. Slide 28 details the favorable market conditions we are seeing across the Eastern states, with vacancy remaining low at 1.1%, led by Sydney with vacancy of just 0.5%. Transport operators are the dominant occupier group, making up 40% of take-up and accounting for 6 of the 10 largest deals in the year. The remainder of market take-up was broad-based, including retail trade at 15%. Market rent growth for 2023 was approximately 18%. We expect further rent growth to occur, underpinned by population growth and the focus from occupiers on investing in their supply chain to drive efficiencies. We are seeing more supply enter the market with the timing of delivery depending on authority approvals, which are experiencing extensive delays, particularly in Sydney. Forecast supply this year has healthy level of pre-commitment of over 40%. With [ good ] levels of current leasing inquiry, the deals are taking longer to finalize. As real estate is a small component of overall supply chain costs, occupiers will continue to upgrade to prime, well-located facilities to achieve the operational benefits that these assets deliver. Moving to our leasing results on Slide 29. During the year, our team completed nearly 170,000 square meters of deals. Positive leasing spreads of 39% were achieved, resetting rents and delivering income growth. We renewed major customers, Super Retail Group and CouriersPlease, along with the expansion of relationships with Mainfreight and DHL across additional facilities. Our portfolio remains under rented compared to market, providing the opportunity to secure higher rents through re-leasing. We have 1/3 of income expiring over the next 3 years and expect average leasing spreads to exceed 15%. Now turning to development. During 2023, 5 assets were completed, valued at $260 million with a yield on cost of approximately 6.5%. 3 of these were within our partnership with QuadReal and 2 were 100% owned by GPT. Half of their portfolio has been developed through the pipeline. This strategy has allowed us to grow portfolio scale and deliver high-quality assets that attract the best tenants, in turn delivering enhanced returns. Moving to Slide 31. Our future pipeline is close to 90% weighted to Sydney and Melbourne, which are the markets we expect to outperform. At Kemps Creek in Western Sydney, our team has been engaging closely with authorities to progress development milestones. Late last year, we achieved planning approval for site work starting next month and delivery of these facilities targeted for 2025. This positions us to capitalize on pent-up demand for new large-scale facilities. The precinct is adjacent to established logistics markets and is within 10 kilometers of the proposed intermodal terminal and the airport opening in 2026. We've also achieved approval for our estate in Truganina in [ Melbourne's ] West. Site servicing is underway, and we will commence construction of the first stage this year. We are delivering high-quality product to provide our customers with the opportunity to expand and optimize their networks and respond to their growing sustainability needs. Turning to outlook. The market remains well placed to deliver rent growth this year with low vacancy, constrained supply and good pre-commitment levels for underway developments. Demand for high-quality, well-located assets will continue, and we are focused on maximizing income growth from the portfolio. We have 7% expiring this year, and we are targeting strong like-for-like income growth in 2024 as leasing outcomes are achieved. As part of our targeted asset recycling program, we've also commenced a process to divest our 50% share in the Somerton estate in Melbourne that is valued at approximately $300 million. In closing, our portfolio is positioned to deliver further growth, underpinned by quality assets located in the deepest markets and complemented by development pipeline to grow scale and enhance returns. I will now hand back to Bob.

Thanks, Chris. As you've heard from the team, our diversified portfolio has delivered solid results for 2023 with growth from the Retail and Logistics portfolios, offset by a material step-up in finance costs. Our financing costs are also expected to move higher again in 2024. While retail sales growth has moderated, our portfolio is well positioned with high occupancy and fixed rental increases. We expect to see ongoing retailer demand for our assets and high occupancy being maintained. For the Office portfolio, market conditions are likely to remain challenging due to elevated market vacancy and subdued demand. While we have 11% of our portfolio income expiring in 2024, we are targeting the Office portfolio to deliver a net income result in line with 2023. Incentives from office leasing deals completed in 2023 combined with further deals we expect to complete this year, will mean a step-up in office leasing capital. Higher incentives will also impact the GPT Wholesale Office Fund. As part of the fund's capital management considerations, the payout ratio for GWOF has been reduced from 90% of FFO to 60% of FFO, which impacts GPT's free cash flow and distribution. In Logistics, the portfolio is well positioned with low market vacancy and continued tenant demand. These conditions provide the opportunity for us to access higher rents with 1/3 of the portfolio expiring over the next 3 years and through the build-out of the development pipeline. The group retains a healthy balance sheet and a strong liquidity position for the year ahead. In terms of earnings and distribution guidance for the year, the group expects to deliver FFO of approximately $0.32 per security and a distribution of $0.24 per security for the full year 2024. Net income growth across the diversified portfolio is expected to be offset by a further step-up in interest costs. Included in the guidance are trading profits from contracted sales at Sydney Olympic Park. These sales are expected to contribute approximately 4% of FFO, which is higher than the historical average trading profits for the group. The lower distribution for 2024 is a result of the step-up in office lease incentives and the lower distribution payout ratio from the GPT Wholesale Office Fund. Russell Proutt is scheduled to commence as CEO of GPT on the 1st of March. It has been a privilege to being the CEO of GPT for the last 8 years, and I'm sure Russell will bring new perspectives and a strong focus on creating securityholder value. Thank you, and I'd now like to hand back to the operator for your questions.

[Operator Instructions] Your first question comes from Lou Pirenc with Jarden.

First question for me. Can you just talk for each of the portfolios where you feel rents are compared to market, kind of over, under-rented or also, particularly in effective terms?

Yes. Sure, Lou. That's a good question. Thank you for that. I would say across the portfolio -- and I think -- first of all, I'll start with logistics because that's the most under-rented [ part of ] portfolio. We do have expiries that are coming up over the next few years. And what we have looked at, we consider to be about 15% under market from what the analysis we have done. So we do think there's an opportunity to capture that. If I look at Office, I think we are about at market, to be quite frank, across the portfolio. And then for retail, there's obviously leases being done all the time. So again, I would say we're about at market for retail as well.

And in Office your [ at ] market in net effective terms?

In net effective -- well, it's depending on how you calculate a net effective. I always found that calculation a little unusual, to be quite frank. But the way I think about it is what is the -- what are the rents, and we are seeing about a 6% step up or increase in face rents, but we have seen elevated incentives and they're around that 35%. Martin spoke to that -- as part of his presentation that on average, incentives have been around 35%. Clearly, we have some deals that are more than that, and there are some deals that are less, but on average, 35% incentive. So I think sometimes you see the spreads being calculated on incentives from the last year versus this year versus expiring rents. So that can be a little bit difficult to calculate, in my mind, [ effectives ].

And then maybe on Office, can you just talk through that 11% expiry in '24? And just maybe talk through the bigger building blocks and what your expectations are?

Sure. So we have 11% expiring. 6% -- just over 6% of that is in the first half of the year. One of the biggest ones is CBA down the second tranche at Darling Park 1. We also have Allianz at Melbourne Central Tower, about another [ 6,000 ], I think it is square meters expiring there. We've been working with the tenant to get access so we can actually position the floors to market those. And then the other one would be Citibank, or Citigroup at 2 Park Street. Martin, are there any others you'd like to call out? I think they are the key ones.

The 3 key ones, that's right.

Your next question comes from Grant McCasker with UBS.

Can we talk about the Office cash flows and how they sort of roll out over the next 12 months? If we think about the rent paying occupancy, what that looks like in 2024 versus 2023?

Yes. I think it will be similar. The average rent paying occupancy during the year, albeit, given our expiries will [ wage in ] the first half, I think what we'll see is our actual occupancy drop in the first half, and we're expecting to claw that back in the second half to get back to our actual occupancy being around the same sort of level by the end of this year. 11% is quite a hefty load again. Pleasingly [ down ] 2025, that drops to 6%.

So by the time we get to 2025, we should get closer to that 92%, 93%, which is your lease rate at the moment? Is that...?

That is what we'd like to see. Yes. Quite honestly, we'd like it to be -- by the end of '25 we are starting to get it up even higher than that. So that's the goal, but there's some work to do, obviously.

And then final, if we think of the Office cash flows just for leasing and maintenance CapEx, I'm just trying to -- is this a permanent reduction in the payout ratio given the CapEx of the portfolio? Or do you see it as just -- purely just this leasing cycle?

Look, what we are seeing is that step up in incentives, that has occurred. I think we're going to see incentives remain elevated for a period until we start to see the market stabilize. So you've got -- vacancy in both Sydney and Melbourne is quite elevated. So I think you'll still see incentives quite elevated for the next couple of years, at least. So I do think we're going to see a higher lease incentive amount coming through in the AFFO capital during the -- over the next couple of years. For next year, or for 2024, I should say, It's about an extra $20 million that we're expecting for leasing capital for -- or incentives for the Office portfolio.

And then just one final question. Outside of Office, Bob, the portfolio is in pretty good shape. I think the Chairman in the annual report said [ you ] shall support the new CEO in the refinement of strategy. Where do you see the opportunity for refinement across the portfolio?

Nice try, Grant. I'll leave that to Russ to speak to you about in a couple of weeks' time. I don't want to preempt anything that he might have. So I won't go there.

Your next question comes from Caleb Wheatley with Macquarie.

I do not want to spend too much time on the Office side of things. So I just wanted to get, I guess, your rationale and your thinking around the net income results in Office being in line, but it seems like that [ sort of ] incentive maybe is a headwind on the other side of that. How do you think about sort of maintaining occupancy potentially at the cost of free cash flow and that higher incentive spend that's coming through in '24, please?

Look, we've set ourselves an aggressive target to get there, and we think it's achievable. We're seeing some good deal flow happen at the beginning of the year. But clearly, we're also trying to be sensible about the incentives too and how that affects free cash flow, the way we structure incentives, trying to do more as abatement rather than necessarily all-in for that cost upfront. So we are thinking carefully about how we do that and manage cash flow.

And maybe just on the GWOF payout ratio as well. Conscious that you're still funding 51 Flinders Lane to come through there, but that seems like quite a material step down in the payout ratio. Just exactly how you're peaking about, I guess, the bridge of gearing and that step down in reduction? And then any broader discussions you're having with the investors across the management platform off the back of it, please?

Look, first of all, the fund has got gearing that's at 23% currently. So it's in good shape. But incentives have stepped up. [ There's no ] question a lot of leasing was done last year, so incentives have stepped up. And what we're trying to look at is the -- I guess, the gearing level over the next few years. It does have a liquidity review in mid-2026, and we have a credit rating that we'd like to maintain through that. So that's been all part of the consideration. Clearly, with capital to fund as well with the 51 Flinders lane, that's all been a part of the consideration for how we make sure we maintain a prudent level of gearing for the fund.

And in terms of the investors that sit underneath the fund? I imagine that -- [ conversations ] we are having [ in tandem ] with that?

Certainly, there was a consultation that was conducted with the Investor Review Committee that was done. And clearly, they'd all like to see the distributions return to a higher level at the right time, but there was support for that reduction.

Your next question comes from Solomon Zhang with JPMorgan.

Just wanted to stick to the theme of Office incentives. Maybe just looking at Slide 23, you've quoted incentives of 35%. I just want to confirm, does that number include, I guess, the suites, which you've previously noted cost [ 0 ] incentives? I guess, if that is the case, then that obviously implies that the balance is higher incentives?

Yes. So that 35% does include the DesignSuites incentives and it includes the cost of building the DesignSuites. So it's all wrapped up in that 35%.

Second question is just on the new mandate win. Could you just give the size of the mandate and how the opportunity came out under the [ CSC ], and I guess, through the previous management [ wasn't ] -- and what the general [ fee ] [ guidance ]?

I think I got your question, but let me know if I missed something. It was really -- you're asking about the size of the mandate. I mentioned in my speech, it's 101 Collins Street, 100% interest in that, 50% interest in QV1 office building in Perth and a 50% interest in the Indooroopilly Shopping Centre in Brisbane. So they are the 3 assets. Approximate value is about $2.8 billion for that portfolio. CSC conducted a process, invited pre-qualified parties to participate in that process. And GPT came through that as the preferred proponent. We worked them late last year on -- just as they did their due diligence on our governance, et cetera. And pleasingly, they've selected GPT, and we're in the process of transitioning that now. The previous manager was [ AXA ]. I think I get all your questions.

Yes. Maybe my line isn't that clear. Is that factored into guidance?

Yes. It has been. Correct.

And sort of assuming second quarter end or sort of midway through?

It will be midway through the second quarter.

Your next question comes from Sholto Maconochie with Jefferies.

I won't [ harp ] on, on the Office stuff, but I just want to ask one question. The Office had Heads of Agreement of 98.3% and I think 90.3% fixed and signed leases. Is that -- you're guiding just offer circa 90%. What do you sort of expect Office vacancy to do, including -- excluding Heads of Agreement for the full year would be sort of stable at 90% and 92%, respectively?

Look, we -- it's very difficult to predict exactly how that will play out, Sholto, as you know. Clearly, we're targeting to lease as much of it as we can during the course of the year. I do flag though, in the first half it will drop, there's no question about that. But it's the second half leasing, again like last year, that we were able to do a lot in that second half. I expect the same this year. So I don't want to get too refined in our guidance. There are a number of moving pieces, but I'd expect to be holding around a similar sort of level of occupancy at the end of this year, at least.

And just on the guidance, if you take out the open centres -- but if you take out the [ trading ] [ profit] 1% of FFO, give or take, it looks like if you take that out, that FFO guidance sort of around 1%. How long were -- can you walk us through what was -- what sort of [ moving ] [ park ] trading profit relates to and how long that was that -- in the pipeline for? It looks like it adds about $18 million on a first year average trading profits on FFO. Can you sort of talk us through that?

Yes. Look, the 2 assets were 6 Herb Elliott and 3 Figtree Drive at Sydney Olympic Park. That [ were ] assets that we were positioning for mixed-use development. The Metro line -- there was a number of compulsory acquisitions around the Metro line and these assets weren't affected by the compulsory acquisition and we did work on the schemes to reposition those for mixed-use opportunities. The opportunity came along for us to transact on those and sell them. And we think we've done a good -- run a good sales campaign and attracted good value for GPT. And those contracts are expected -- well, are [ exchanged ] and should settle in the fourth quarter of this year. They represent about 4% of the FFO, just the 2 of them together, so they are material. And that's why we've called them out.

About $25 million, give or take?

Maybe a little closer to that number, yes.

And then finally, on the secondaries in the funds, were there any secondaries traded in GWOF or the shopping centre fund?

No. There's been no...

[indiscernible]

So look, first of all, there is -- it's a bit like the direct trading market at the moment. There is very limited transaction activity occurring out in the market with direct real estate and like that -- and similar to that in the secondaries for the funds. There's been no trading activity in either fund over the last 12 months of secondaries.

Your next question comes from Howard Penny with Citi.

Congrats, Bob, on great innings and good luck for the next challenge ahead. Just maybe on retail. Just on the retail side, I think the leasing spreads are -- remains a positive surprise in the markets and achieving, I think, a lot higher than what we see in consensus expectations. How do you see those leasing spreads evolve over the next 2 years? Do you see that normalizing back down? Or do you see reasons why it could still stay as elevated as it is?

Chris -- would you like to [ answer ] that, Chris?

I'm happy to. Howard, I think you'll see that leasing spreads have improved. I think we're about 3%, or negative 3% in December last year. June we were about 3%. Today, we're up 5%. And that, look, purely is just a consequence of having really strong sales, incredibly high leasing demand and strong occupancy in the centres. And our outlook for '24 is that those 3 things will remain, and we look to have positive leasing spreads continue throughout the year.

And then just on logistics. I know the leasing spreads are also very high in that area. But we are starting to see, at least in the likes of [ JLL ] data, some supply coming through in the next 2 years in developments. But is some of that being constrained by planning permissions, et cetera? How do you see that demand supply balance evolving?

Chris Davis, would you like to answer that one for Howard?

Yes. Thanks, Howard. So we are still seeing good tenant demand in the market, which has been encouraging. Vacancy is a starting point this year, is at 1%, so it's very low. And the supply that's coming online this year is quite measured. So the 22.2 million square meters that is underway is about 43% committed. So it means that certainly -- that planning delays, as you mentioned, is certainly helping the market.

And maybe just a final question, and it's just slightly broader on the Funds Management side. And just thinking about where the demand from capital is coming from, do you see an uptick overall in the market from demand from investors globally at the moment [ and ] includes Australian asset classes?

Look, I would say that there's interest -- clear interest in Australia, but I think investors just generally are remaining cautious and want us to have a bit more confidence in where the interest rate cycle [ hasn't ] peaked, and I think we're all expecting that it probably has. But does that turn? So I think just clarity around the interest rate cycle, and then confidence around valuations. So I think they are the 2 things that investors are sort of sitting on the sidelines [ so ]. There will be another round of valuations in June. I would expect that will start to provide a bit more of a point of confidence for where valuations [ delaned ] for each of the sectors at the moment. We are still seeing good inquiry for things like logistics from the -- I'd say, office is less so. And there has been a little bit of a pickup, I think, in -- interest in retail. So that's what we're seeing.

Congrats again, Bob.

Yes. Thank you, appreciate it.

Your next question comes from James Druce with CLSA.

A couple of questions, if I may. Firstly, on the logistics assets that you sold, I think it's 5 assets for $150 million. Just a strategic rationale for that?

Chris, would you like to talk to that?

During the course of last year, we sold 5 assets, so 2 of those were in the first quarter and then 3 of those were in December. So we're able to catch value through those assets. In the last couple of years before that we completed quite a bit of leasing, and we're able to achieve strong prices for those assets. So their older assets are able to recycle the capital and then we can invest that back into high-returning opportunities.

So the rationale really for it is, we do think we've actually captured the value in those and the leasing that we've done on those assets. And then I think we can recycle that capital to better returning opportunities, particularly in the development side. So that has been the rationale.

And then, I may have missed this, but the -- just the driver of the drop in the payout ratio in GWOF?

Yes. Sure. For GWOF there's been 2 things. First of all, it's gearing is about 23%. So it's still in good shape. But the view was that we're going to see more elevated incentives -- leasing incentives in the near-term. You had a payout ratio of 90% of FFO and to make sure that you're actually not just paying out capital we have decided -- and to maintain our credit rating, decided to need to bring that down. It's also -- the fund is also funding at the moment the development at 51 Flinders Lane. So all those things combined from a capital management perspective to say, it'd be prudent to bring that -- the payout ratio down. That was something that was discussed with the investors and supported by the investors. And that just -- it flows through to GPT's free cash flow because we get a distribution out of the fund. So that's what's hurt free cash flow, and that's how we base our distribution, is our free cash flow.

After that development's completed, is there any expectation that the payout ratio will increase again?

Look, first of all, I don't want to preempt where that will go. I think it's -- what I would say is that many of the investors would like to see it return to a higher level at the right time, but I don't want to preempt when that will actually be.

One more, if I may. The specialty sales growth for 4Q ex Melbourne Central, where did that come in at?

Chris, do you have that number to hand?

Look, I do. The total specialty MAT, I think we said, grew at 6.1%. Melbourne Central was a big chunk of it. I think total specialty MAT went up by about 18% or 17%. I don't have it excluding that. But I will say that if you look at maybe the beginning of this year with January sales for the GPT managed portfolio, estimate is that we should achieve about 6% growth January on January. So we started the year with a pretty good start, I would suggest.

What about this for the fourth quarter on [ ECP ], not the rolling [ MAT ]?

I think, if you have a look at our sales panned out last year, obviously, an incredibly strong first quarter. We're up about 16%. We were 8% for the second. We sort of normalized more in the second and third -- sorry, third and fourth quarter for the year we were around about 4% and 3%. So that's how we ended the year out. And as I said, it looks like January has consistent -- continued with consistent growth up about 6%.

So just to clarify, are we talking about annual MAT, are we talking about [indiscernible] [ quarter ] on the [ ECP ]?

That's the movement of our MAT quarter-on-quarter.

12 months -- Rolling 12 months?

Yes.

Your next question comes from Ben Brayshaw with Barrenjoey.

Congratulations on your tenure at GPT, and thanks for everything over the years. Just a question on Australia Square. You put that asset to market last year. I was wondering if you could talk about the sale process and what type of buy demand you saw and how the pricing on that based on that process compared to the current book value of $565 million?

Yes. It's- I'm sure I have quite answered that, Ben, because we did put it to market, but we didn't receive any bids. So there was interest, people doing -- working on the -- in the data room to look at the asset. But clearly, they had -- we had a view of where our price point was, and they must have been below, but we never really received bids for it. We decided to remove it from the market because there was a little bit of a concern about the leasing risk from prospective purchases. And so we've turned our [ attention ] -- well, not that we hadn't, but we've continued to focus now on just getting the asset leased up. And then you've got options whether you want to hold it or divest at some point again in the future.

I can see on the presentation, Slide 6, the average discount rate for Office is 6.5%.

Yes.

Have you got a sense as to what the market is looking for from office in terms of the required return?

I don't really, because [ of ] what I am -- what I would say to you is the only buyers that I've seen, they are pretty opportunistic, and they're looking for returns that are not really for core product. So they're really looking for opportunistic returns. I couldn't tell you exactly where -- what they're expecting -- a core buyer would expect at the moment. There's not a lot of that [ doing ] work on -- doing that at the moment. Not a lot of core purchases out there at the moment.

Your next question comes from Alex Prineas with Morningstar.

Just on the split between -- in office, the split between the deals on the greater than 1,000 square meters versus less than 1,000 square meters. A bit of an uptick in the larger tenants measured by a sort of net lettable area this year. Is there any -- are you seeing signs of larger tenants returning to sort of higher levels of commitment and confidence? Or is that statistic more of an aberration?

Yes. I guess, beginning of last year it was just smaller tenants in the market, but they -- the larger tenants, and by that we mean more than 2,000 square meters. They started to emerge in the second half of last year. And I think the general view is that, that seems to be continuing in the early parts of this year, that there is more larger inquiry around than compared to 1 year ago. So look, I don't think it was just a small uptick. I think there's a bit more to it at the moment.

[indiscernible]...

I'm sorry. Alex, I was just going to say, I think the -- what we're seeing in the market is supporting those more larger tenants in the market doing work.

And can you comment on, for tenants that did renew proportion that increased space, kept the same or decreased space?

Yes. So -- yes, of course. So about 80% stayed the same size, about 5% increased their area and about 15% reduced their area. So it's a strong weight [indiscernible] the same size.

And just one more question, if I may, on Funds Management. Are there any sort of active discussions at the moment about possible new funds or acquisitions? Can you give us a bit of color there on what's maybe in the pipeline?

I don't think it's premature for me to do that. We were -- CSC, it was a great win for us, bringing that across. We're focused on making sure we embed that in the business, transition it well and then focus on performance for them. We do think there's opportunities to grow with some of our existing mandate clients. And I don't know if you saw recently, but any -- super recently purchased a large industrial site in Melbourne, and we're looking forward to working with them on that and expanding their portfolio.

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

All right. Well, thanks, everyone, for joining us for what was my last, and definitely my last earnings call, and I'll pass over to baton to Russell next week. It really has been a privilege to have led GPT over the last 8 years, and I leave knowing that it is in good hands. And I'd like to wish each and every one of you all the very best for the future. So it's over and out for me. Thank you.