Thank you for standing by, and welcome to the Growthpoint Properties Australia 1H 2022 results call. All participants are in a listen-only mode. There will be a presentation followed by a question- and- answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Michael Green, Chief Investment Officer. Please go ahead.
Good morning, and welcome to Growthpoint Properties Australia's First Half results for financial year 2022. I'm Michael Green, Chief Investment Officer for Growthpoint, and I'm joined today by Dion Andrews, Growthpoint's Chief Financial Officer. Tim Collyer, Growthpoint's Managing Director, is taking a well-earned break and will be returning to work next week. This morning, we will start with a brief overview of our results, followed by an update on our property portfolio and detailed review of our financials. We'll close with an outline of our strategy as we look ahead to how well we are positioned to build on our performance in the first half. Dion will now take us through an overview of our performance over the half.
Thanks, Michael. Turning to slide four, half-year highlights. I'm very pleased to be able to present another set of strong results for the half. Our FFO was AUD 0.136 per security, growing 7.1% over prior corresponding period. Over the half, we made strategic accretive acquisitions, investing over AUD 300 million in three high-quality office assets, one of which is to settle in February, and acquiring additional Dexus Industria REIT securities. The group's portfolio value increased by 6.6% or AUD 300 million on a like-for-like basis. With the uplift reflecting positive leasing outcomes alongside favourable market conditions, which Michael will touch on later in the presentation. We maintained both our portfolio occupancy at 97% and our long Weighted Average Lease Expiry or WALE at 6.3 years.
We also enhanced our capital position during the half, taking advantage of low pricing to refinance AUD 715 million of debt, reducing our refinancing risk and extending our weighted average debt maturity to support our growth ambitions. On the strength of progress in the half, we were pleased to upgrade guidance in December 2021. We increased FY 2022 FFO guidance to at least AUD 0.27 per security, representing a minimum 5.1% growth from FY 2021, and distribution guidance of AUD 0.208 per security, an increase of 4% over the prior year. On slide five, we've highlighted our total security holder return compared to the S&P/ASX 200 A-REIT Index.
Over calendar year 2021, we have witnessed an appreciation in security price as it made up lost ground over the initial stages of the pandemic, and returns were significantly above the index. Our return on equity was 24.5% for the year, with the result reflecting significant valuation gains across the group's office and industrial portfolio in the period, with the 16.1% return per annum over 10 years speaking to the group's track record of providing value. However, despite the appreciation in our share price over the year, we are currently trading at a substantial 11% discount to our NTA. I'll now hand over to Michael, who will provide an update on our property portfolio.
Thanks, Dion. Growthpoint made several accretive acquisitions during the half, increasing our exposure to well-leased, highly green-credentialed A-grade metropolitan office properties. This includes 141 Camberwell Road in Hawthorn East in Victoria, which we have entered into a contract of sale to purchase the property for AUD 125 million. The property is 99% leased to high-quality tenants with a 6.8-year WALE, and we expect to settle the acquisition later this month. An attractive blended yield of 5% and a WALE of 7.2 years from the direct assets acquired complement our high-quality portfolio and are located in markets where we have a strong track record of exacting successful asset management outcomes. We also maintained our circa 15% holding in the Dexus Industria REIT by participating in their September equity raise.
Slide eight provides an overview of Growthpoint's AUD 5 billion portfolio. The high occupancy of 97% was maintained over the half, and the WALE has been extended to 6.3 years. The group's growing income stream continues to be underpinned by government and high caliber corporate tenants. Moving on to office markets. Conditions have improved and there are positive signs, with tenant demand and investor confidence increasing over the last six months. Vacancies have started to stabilize or reduce in most office markets, while investment demand has strengthened. Increasing investment activity and yield compression is evident, particularly for well leased A grade assets in metropolitan and fringe locations. Notably, the metropolitan office market have outperformed their CBD counterparts over the last 12 months, with comparatively higher positive net absorption providing a solid base for future rental growth.
Growthpoint is the largest listed owner of metropolitan office properties, with 90% of our office portfolio being well positioned within key metropolitan office precincts. On slide 10, we provide an overview of the group's office portfolio. On a like-for-like basis, Growthpoint's office portfolio increased in value by AUD 160.4 million or 5.3%. Some strong leasing results extended the office portfolio WALE 7.1 years, and that, combined with the positive market momentum, saw the office weighted average cap rate compress from 5.3% to 5.1%. Firming of cap rates in city fringe locations led to solid gains across the group's portfolio, including Botanicca 3. We are confident in the outlook for the office sector and particularly metropolitan markets. Moving now to slide 11.
Over the last 10 years, Growthpoint has funded through or directly developed a number of high quality office and industrial properties. We've always seen it as an excellent way to access new assets with high green credentials, and by partnering in the development phase, we are able to forge a long-term, mutually beneficial relationship with the anchor tenant. In December 2021, we extended FOX Sports lease for eight years at Building C in Artarmon, and it provides an excellent example of where we have utilized our expertise in opportunity identification, development, and asset management to generate compelling property returns for our security holders. Turning to slide 12. The industrial market continued to perform remarkably well during the half, with a record level of gross floor space take-up resulting in historically low vacancy rates, as we see in our industrial portfolio, which is now 100% occupied.
The high level of occupied demand has resulted in strong effective rental growth across all industrial markets, with incentives trending downwards. On slide 13, we provide an overview of the group's industrial portfolio. Through active leasing over the six months, Growthpoint's industrial portfolio reverted to being 100% leased. Strong leasing results combined with positive underlying market fundamentals and yield compression, saw all of Growthpoint's industrial assets increase in value over the half. It is particularly pleasing to have leased 5 Viola Place, which was previously vacant to Eagers Automotive until 2033. This has led to a 54% increase in the property's value over the last six months. Moving on to slide 14. Creating value for our security holders via our investment decisions and execution is what we at Growthpoint pride ourselves on. We identified 3 Maker Place via an on-market campaign.
While other parties at the time were concerned by the short lease for the lease space, we saw it as an opportunity based on the working assumption that market rents would rise over the three-year timeframe. Pleasingly, that has eventuated, with effective rents for the asset increasing by 90% since the time of the acquisition. The valuation of the property has also benefited by a 140 basis points yield compression that has occurred since the time we purchased the property. Now looking to slide 15 on leasing. The group had another solid half of leasing across the portfolio, completing leases over approximately 10% of the portfolio by income. Three key callouts from this slide are the 93% retention rate, which reflects the strong working relationships we have with our tenants and the high quality of our portfolio.
Secondly, pleasingly, we extended the leases of our two key office occupiers with FOX Sports and Samsung recommitting to their respective premises without shrinking their office space requirements. Bunnings also expanded its footprint and committed to an additional floor at Botanicca 3 during the half. Thirdly, the industrial portfolio is back to being 100% leased and fully income producing, up from 98% occupancy six months earlier. Moving on to slide 16. Continued good work from Growthpoint's asset management team in addressing our lease expiries early has ensured that we have consistently maintained a long Weighted Average Lease Expiry across the portfolio, which is presently at 6.3 years. The major remaining expiry for FY 2022, accounting for 5.3% of income, is Woolworths at Larapinta, where there is presently a live market rental determination underway.
We anticipate receiving the findings of the independent determination at the end of February. Woolworths has served notice of their intention to exercise a five-year option over their premises. Switching now to sustainability on slide 17. Growthpoint was pleased to be classified as a sector leader by the Global Real Estate Sustainability Benchmark in 2021. Not resting on our laurels, we are working hard towards achieving our 2025 net zero target, with three solar installations in progress and feasibility studies on six others ongoing. We have long targeted energy efficient office buildings with our acquisition strategy, and the portfolio currently boasts an average NABERS energy rating of 5.2 stars. I will now hand back to Dion to discuss the group's financial results in more detail and to close the presentation.
Thanks, Michael. Starting on slide 19, we again highlight our strong first half performance, delivering FFO of 13.6 cents per security, an increase on the net property income result in the following slides. A couple of additional points to highlight in the half, as we noted on the slide, we've reduced our net financing costs in the half with a lower Weighted Average Cost of Debt through the period following the group's significant refinancing activity. This is now at 2.9% at 31 December, down from 3.3% at June 2021. Increased operating expenses in the half were primarily driven by an increased head count as the group positions for growth. This is as opposed to the prior corresponding period where we were focused on cost containment in the early phase of the COVID pandemic.
This has led to the group's management expense ratio returning to its long-term average of around 0.38%. The distribution increased by 4% for the half to AUD 0.104 per security on a slightly lower payout ratio. On slide 20, we've highlighted the key movements to FFO and NTA per security. The key drivers of the FFO increase include an increase to net property income, driven by further leasing of Botanicca 3 during the half. The acquisition of Eleven Murray Road, Sydney Olympic Park in August 2021, although this was largely offset by the sale of the Quad assets, also located in Sydney Olympic Park, which occurred in May 2021. The other key driver, as mentioned earlier, was a reduction in borrowing costs as the Weighted Average Cost of Debt reduced following the refinancing of debt facilities and restructuring of associated derivatives.
NTA per security increased to AUD 4.55, an increase of 9.1% on 30 June 2021. This was largely driven by the significant valuation uplift across both office and industrial portfolios, which Michael highlighted earlier. The Dexus Industria REIT share price has also increased in the period. Turning to slide 21, we can see that gearing increased by 150 basis points to 29.4% at 31 December, and remains well below the group's target range of 35%-45%. The group had AUD 315 million of undrawn debt at 31 December, all of which it could deploy and remain below the target gearing range. Some of the undrawn debt will be deployed to settle 141 Camberwell Road.
We are actively looking to further deploy debt to support our growth ambitions, which will be accretive to our FFO in the second half of the year. With gearing well below the target range, we are in a good position to extend the buyback program as we've announced today, as well as funding future growth opportunities. As I touched on earlier, our distribution payout ratio is in line with the target payout ratio, assets maximizing value and maintaining high occupancy. The group has been able to deliver a consistently strong performance over a long period of time. In many ways it sounds simple, but our laser-like focus on acquiring and managing quality property in the right markets, along with our ability to form strong relationships with our tenant customers, has held us in good stead.
Our goal is to provide security holders with sustainably growing income streams and long-term capital appreciation. Moving now to slide 24. In the half, we've delivered a robust performance in line with our strategy and our position for continued growth over the rest of the year. As we touched on earlier in the presentation, Growthpoint has a long track record of delivering value on our investment in high quality assets. The over AUD 300 million invested by the group over the half will support continued value creation and growth for the group. The valuation uplift achieved in the half reflects the quality of the portfolio, and we continue to invest to maximize value, investing circa AUD 30 million in asset expansion to create value and support lease extensions. We also continue to invest in refurbishment to enhance building amenities.
As you have seen in the presentation, we've maintained our high occupancy with strong leasing success across our office and industrial portfolio in the half, including a 93% retention rate. We continue to explore opportunities for growth for the group. These include high quality office and industrial property acquisitions, where we focus on modern assets with strong tenant covenant, as we covered today with the three office assets acquired this half. Funds management opportunities, which we continue to explore, having looked at a number of opportunities over the half, which have not been right for the group for a variety of reasons. We have been close here, including having one opportunity in due diligence. However, we'll maintain our discipline and only proceed where we are confident it is in the best interests of our security holders.
The securities buyback, on which we've announced an extension to our current program today. Buying our securities where we believe the market is significantly mispricing them, will provide attractive returns to our security holders while not limiting our ability to pursue other growth opportunities. Finally, M&A is always on the menu for the right opportunity. When we're assessing the attractiveness of different opportunities, there are four key considerations we use to weigh capital allocation. The level of FFO accretion, the ability to leverage Growthpoint's expertise, the balance of risk and reward, and finally, the long-term potential for the group. Now for the outlook on slide 25.
We have delivered a robust set of financial results over the first half, including FFO growth per security, an upgraded FY 2022 guidance, investment of capital for portfolio enhancement and FFO growth, significant valuation uplift across the portfolio and strong leasing success, and a record debt refinancing. We are well positioned to build on these results with growth momentum for the rest of the year. We are confident Growthpoint will continue to deliver on its long track record of sustainable returns to our security holders. Therefore, we are pleased to reaffirm our guidance of FY 2022 FFO of at least AUD 0.27 per security, representing a minimum 5.1% growth over FY 2021. FY 2022 distribution of AUD 0.208 per security, up 4% on FY 2021. That wraps up our prepared remarks.
Thank you to everyone attending today and all those who work for, with, and support Growthpoint. We'll now open the lines to take questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Caleb Wheatley with Macquarie. Please go ahead.
Good morning, everyone. My first question was just around guidance. FFO per share of AUD 0.136 in this half, reaffirmed AUD 0.27 for the full year. That implies a decline in the second half. I'm just wondering, with the lower cost of debt, and some acquisitions coming in, what's the driver of that decline half on half, please?
Yeah. Thanks, Caleb. It's Dion here. When we provided that guidance in December of at least AUD 0.27, and I'll just remind everyone, it is at least, that's a minimum, it didn't include the settlement of the 2-6 Bowes Street property, and it was uncertain exactly when that would settle at the time. It didn't include 141 Camberwell Road. As we said in the presentation, as we deploy debt and make acquisitions, we would think it would be accretive to our FFO. That's a minimum or an at least guidance of AUD 0.27.
Okay. That full year guidance does that factor for 2-6 Bowes Street or 141 Camberwell Road?
Yeah, that's right. It doesn't depend on those properties settling.
Sure. Just around the strategic initiatives. Last result, a pretty big emphasis on the funds management side of things. Are you able to provide any update on level of interest being observed here from potential capital partners, or any other comments around, I guess an update on that fund management side of things?
Look, not really over and above what we said in the presentation. I think the emphasis we gave last half might have made it too emphatic. We wanted to say that we're looking at a number of opportunities when we're choosing our capital allocation. We'll always choose the best one that's before us. We are still looking. It is still something that we will move into in the future. Yeah, that's competing with direct property acquisitions, the share buyback, other opportunities that we're seeing as well.
Yeah. Do you have a preference given sort of market pricing for direct assets? As you said, yields have compressed. Sounds like the buyback is pretty attractive at current discounts to NTAs. Is there a preference in terms of that deployment off the balance sheet?
No, no preference. It's all just what is the best interest at the time.
Sure. Final question from me, just around the like-for-like NPI growth in industrial, of 1.3%. Some pretty positive comments around tenant markets, and some pretty strong prints in the past. Are you able to just provide a bit more color, on the components of that 1.3% and maybe some commentary on what you might expect over the next six to twelve months, given occupancy now back at that 100% level?
Yeah. Caleb, it's Michael Green here. Thanks for the question. I think really it links back to the prior period. We obviously did fill up the remainder of the industrial portfolio, however, that was late on in the half. You're not seeing the full effect of that. We'd expect to see the Eagers lease come through really positively in the like-for-like numbers going forward. The other key feature is some of the leasing that we've sort of pre-arranged essentially for coming periods. As mentioned, we've got a heads of agreement at Three Maker Place, which is showing a significant uplift from where effective rents were three years ago and clearly where they are on the current lease.
We'd expect to see as vacancies roll into the portfolio to see good uptake in like-for-like income and industrial side of things ahead of where 1.3% is today.
It's really driven around the PCP. It sounds like it's offering a stronger PCP and that would look to normalize from here. Is that the right way to read it?
No, I think that's exactly the right way to read it.
Perfect. That's all from me. Thanks so much for your time this morning.
Thank you. Your next question comes from Mollie Urquhart with Barrenjoey. Please go ahead.
Hi. Good morning, Michael, Dion. Incentives for office, we saw them increase in the half to 29%. Do you have a sense of where this will go over the next six months? Can you see a bottom there given some interest you've had in the portfolio and some leasing success?
Yeah, sure. Thanks for the question. I think approximately 12 months ago, so the end of 2020 was when we found it the most challenging in the office market. We've definitely seen an uptick in inquiries and, given the levels of inquiries that we're getting on our vacancies at the moment.
Brilliant. Just on industrial, do you have a view on how under-rented the portfolio is at present?
I've got a view versus what the valuation, market rents sit across our portfolio, but sometimes the value is possibly not as attuned to where the market is as others. As far as the overall portfolio, our portfolio is just around 5% over-rented. Whether that's what transpires when you come to each lease expiry, it'll be obviously on an individual basis and individual market.
Okay. A couple of final ones. On the corporate costs, so some of those came back into the business. Were any of those related to the funds management opportunities that you have flagged before?
None of the headcount was related to the funds management opportunities. We obviously had some expense associated with the due diligence that we were looking through.
Got it. Just one final one. Can you give an update on how progressed you are on the New South Wales Police Force incentive?
Yeah, sure. I'll take that one. Little of it's spent to date, and we've only spent a de minimis amount so far. We are expecting now that they're finally getting their program underway, from March. There'll be a little bit spent in FY 2022, but it'll really be an FY 2023/2024 story now.
Brilliant. Thank you very much.
Thank you.
Thank you. Your next question comes from Alex Prineas with Morningstar. Please go ahead.
Good morning. Thank you. Just interested in the NTA, the assumptions behind the NTA, given things like the discount to NTA is a big driver of continuing the buyback. The NTA is cut at the end of the year, but since then, you know, there's been a lot more interest rate increases priced in by the market. I was wondering if you could talk through, in terms of the assumptions that go into the NTA, how much of it is sort of more through the cycle assumptions around interest rates or do they cut it more based on whatever the prevailing rates are at the time?
If that's all clear, Alex, you're asking, I think, what impact to NTA, perhaps future valuations of property are gonna be impacted by as a result of rising interest rates.
Yeah. If you can sort of talk about, yeah, the sensitivity of the NTA to interest rates.
Well, that would really be on a investment property valuation basis. I might let Michael speak to that.
I mean, the property portfolio is valued as at 31 December 2021. You know, each individual property is valued on multiple bases. On a discounted cash flow basis, on a capitalization approach basis, and also on a direct comparison basis. That's what's used to determine what the individual properties are valued at. That's really, you know, the value is looking at as at that date. As far as that's the NTA. That's obviously a key component of what makes up our Net Tangible Assets: our overall portfolio value. As far as, I'm not quite clear what you're asking on-
I think.
Looking forward.
Yeah, I think looking forward.
I guess I'm trying to get a sense of, as you mentioned, it's sort of done based on the prevailing interest rates at the time. Since the end of the year, we've had, you know, significant sort of concerns about interest rate rises being priced into markets. I guess I'm trying to understand.
I suppose then, maybe if I translate the question into what's happening in the direct market at the moment. You know, from the conversations we're having, we're not seeing a real change in investment appetite into either the office or industrial sector at present. I think there's still a large weight of capital looking to seek a home in both sectors, which will continue to buoy values at the present time. As far as looking forward to what will or won't happen with interest rates, you know, Dion, perhaps you're better positioned to-
Yeah.
Comment on.
Yeah, no, I think it's the impact on NTA, and you're asking about, you know, what our assumptions are when we're looking at a share buyback and perhaps the future impact of NTA when we're looking at discounts to it, et cetera. As Michael said, in the short- to- medium term, given the weight of capital, we don't think, and perhaps some net effective rental growth, we don't think property values will be negatively impacted. You know, our assumptions on NTA is, we won't predict what's gonna happen at 30 June to property values exactly, but we're not seeing large downward pressure at the moment.
Okay, thanks.
Thank you. Your next question comes from Annabelle Atkins with J.P. Morgan. Please go ahead.
Oh, hi, everyone. Thanks for your time today. I'm just interested in your office CapEx profile going forward. You've guided 0.3%-0.5% of the asset value range, the top end of that range. I'm just interested, given that like the flight for quality and the increasing demand from tenant selection, is this a bit of a conservative amount. I'm just interested in your thoughts on the need to upgrade your office spaces near term.
Sure. We have a very modern office portfolio, which has, you know, been built up really through acquisition since 2011, where we've always targeted modern assets. We funded through a number. We also consistently spend money on our properties. We haven't sort of neglected anywhere we feel that they are going to miss out from a fit-out quality perspective. What we have done is we have divested some of the B-grade office properties that we've held in the past. The Quad assets, for example, we divested last calendar year, and then we reinvested those proceeds into buying A-grade office properties so that we could continue to provide what we think will be attractive to occupiers.
I think the other key element I'd sort of stress is looking at the retention rate across our portfolio over the last half and also a number of our key office occupiers renewing in the same amount of space in the buildings that were developed for both of those tenants. FOX Sports and Samsung are the two examples in the presentation, where you know they're really happy with the quality of the accommodation, happy with us as a landlord, and we've worked together well. We don't think it's being overly conservative. We do like to continue to maintain our properties at the A-grade level that they're at. We are not in a situation where we own a lot of B-grade assets, and we're having to upgrade them in order to attract occupiers.
We have A-grade assets that are well-located and already highly appealing to current occupiers' needs.
Okay, great. Thanks.
Your next question comes from Ed Day with MA Financial. Please go ahead.
Morning, Michael and Dion. Just firstly, with the rent review at Larapinta, could you just sort of explain the components of that independent determination?
I think, well, the valuer essentially receives submissions from both parties. He will pay some heed to those and also determine his own view on what the market rent is for the facility. That will then be as at the end of this month, that date, and we'll get the results of that disseminated to us shortly thereafter.
I guess what have you.
Another sort of market rent review process where you look at, you know, comparable rentals in the immediate vicinity, and then because of the nature of the facility, being the size that it is, so also, look at rental comparisons from other markets.
Right. I guess what have you assumed in terms of including in your guidance?
I mean, because of the commercial nature of it, I won't go into any detail on that right now. I will say that any sort of change, upward or downward, will only impact four months left of the year. This determination will be at the end of the month. Then the balance of March, April, May, June will be where it impacts FY 2022. It's not gonna be a significant impact on our year- to- date.
Yeah. Okay. Just on your office leasing, just wondering if you could give a bit more detail on your leasing spreads for renewals and new leases.
Just earlier on the call. Across overall, the office leasing spreads were down a little bit. Overall, the portfolio is down to about 2%. Not a major impact across our leasing spreads but yeah, about 2% across the whole portfolio.
Yeah. Then, sorry, just finally on the industrial incentives, sort of relatively flat at 18%. Is that? Yeah, I think you did four sort of reasonable size industrial leases during the period. Is there any outlier in those leases you've done, or is that market and where do you see that trending?
I think it's trending downwards at the moment. I think there's still a reasonable difference between standing stock incentives, which are trending lower, and pre-commitment incentives are still seemingly reasonably inflated from the discussions that I'm having with developers. I would say across most markets, you're seeing a strong take-up of industrial space, which is translating to downward pressure on incentives. That's what we're seeing as well across our portfolio, whether it's renewals or new tenants coming into our standing assets.
That's great. Thanks, Michael.
No worries.
Thank you. Your next question comes from Carlos Cocaro with Renaissance Asset Management. Please go ahead.
Hi, guys. Look, I just wanted to hark back to Alex's question on NTA assumptions. Michael, you said that some of your properties were valued on a DCF basis. For those properties, can you actually quantify in the discount rate, what risk-free rate and what risk premiums on average were actually arrived at?
Yeah. Well, I can tell you, I would say you're sort of looking at our average discount rate across our portfolio versus, what it's previously been. Is that what you're asking, essentially? And then-
Yeah. What the makeup is at the moment.
Our average discount rate across the portfolio is just under 5.9% at the moment.
Mm-hmm.
If you look at, you know, in December, that would give you probably a 4.2% carry on what the risk-free rate would have been at the time. Obviously that's a static number at that 31 December. You know, 10-year bond rates moved out since then.
Is 4% the normal risk premium that gets applied throughout the cycle?
It's probably at the tighter end right now across our sort of five-year average. You know, equally, it has moved around a bit over that journey as well. I think what's happening with the market at the moment is, it is moving more to a total return discussion with rent growth being what will most likely propel valuations over the next 12 months. I suspect that some of the free kicks that industry's been receiving from yield compression probably won't be as prevalent in the next 12 months just because of this interest rate pressure. From the discussions we're having, we don't see any sort of change in appetite for assets. Also we do feel that both sectors are well positioned to get some growth in rents going forward, too.
Okay, got it. Thanks very much.
Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you all for participating. You may now disconnect.