The webcast is also open for online questions, which can be entered at any time. I would now like to hand the conference over to Mr. Ross Lees, Chief Executive Officer and Managing Director. Please go ahead.
Thank you. Good morning. My name is Ross Lees, CEO and Managing Director of Growthpoint Properties Australia, and I welcome you to the presentation of our half-year 2025 financial results. I would like to begin today by acknowledging the traditional owners of country throughout Australia and their enduring connections to land, sea, and community. We pay our respects to their elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander people joining online today. Today I join you from the land of the Wurundjeri people of the Kulin Nation, and I pay my respects to their elders past and present. Presenting alongside me today is Dion Andrews, our Chief Financial Officer, and Michael Green, our Chief Investment Officer. I'm also joined in the room by Jackie Jovanovski, our Chief Operating Officer, and Alex Holston, our Head of Corporate Affairs and Investor Relations.
We'll provide an overview of our strategy and review of the half-year before opening for questions. Turning first to slide four, an introduction to Growthpoint as it stands today. Growthpoint has AUD 5.4 billion in assets under management across 65 properties in the office, industrial, and retail sectors. This is a combination of AUD 4.1 billion of directly held assets and AUD 1.3 billion managed on behalf of third-party wholesale and institutional investors. We will look to grow in each of these sectors as we execute our strategy. Today, I'm pleased to announce Growthpoint's updated purpose statement, "Creating Value Beyond Real Estate." This renewed purpose reflects our commitment to delivering exceptional benefits that extend well beyond the physical properties that we manage.
We strive to positively impact all stakeholders, from generating returns for our security holders to providing innovative solutions for tenants, protecting our environment through sustainable practices, fostering community engagement, and investing in our employees. Our vision is to create sustainable value in everything we do by being the forward-thinking, trusted partner of choice. In pursuit of our vision, our strategy is to deliver growth through funds partnerships while continuing to deliver income-driven returns from our portfolio of directly held, high-quality real estate assets. We will execute this strategy guided by our key pillars of portfolio performance, growth, efficient allocation of capital, and sustainable future proofing, which I'll discuss more shortly. Our success will be driven by our exceptional people who live our values and drive our tenant advantage.
Turning now to slide six, our first half performance has been driven by strategic capital management and the strength of our portfolio, with momentum into the second half of FY 2025. We delivered funds from operations, or FFO, of AUD 11.80 per security, announced a distribution of AUD 11.20 per security, and reduced our gearing to 38.8%. Our directly held portfolios maintained high occupancy and increasing weighted average lease expiries, and we increased the amount of co-investment, aligning ourselves with new third-party investors.
Turning now to slide seven, where we can see our strategic pillars in action as our team has demonstrated momentum executing strategic and growth initiatives. We completed leasing equivalent to 18.9% of our industrial portfolio and 3.3% of our office portfolio, generating occupancy of 98% and 92% respectively. We maintained long weighted average lease expiries in our portfolio with office at 5.9 years and 6.2 years for our industrial portfolio.
We've demonstrated success in growing our business through the half. In October, we established the Growthpoint Australian Logistics Partnership with international partner TPG Angelo Gordon, and in December, we launched the Growthpoint Canberra Office Trust with the purchase of 2 Constitution Avenue, Canberra. Additionally, we agreed the expansion of our Perth distribution center with Woolworths, which will increase gross lettable area by over 13%. The efficient allocation of capital has seen AUD 335 million of cash proceeds generated from asset sales, allowing for reinvestment into the Canberra Office Trust and the Logistics Partnership, reducing our gearing below 40%. Our focus on sustainability has continued with an increase in our GRESB score to 85, issuing AUD 125 million of sustainability-linked loans and staying on track with net zero. I would like to hand over to Dion now, who will cover the financial results in more detail.
Thanks, Ross. Turning to slide nine, I'd like to call out some key results. Property FFO is up 0.9% on a like-for-like basis, which excludes higher lease surrender payments in the prior half as well as divestments. This is indicative that overall rents are turning positive for the group. Property FFO also includes distributions from Dexus Industria, which were reduced by AUD 2.2 million versus the prior corresponding period due to the sale of our holding in October. Reduced income from this capital release was offset by lower interest expense as debt was repaid. The growth in funds management is now adding to the profitability of the group, with revenue increasing by 43.9% to AUD 5.9 million, driven by the launch of the two new funds in the half.
Net finance costs have increased slightly as a result of the combination of higher floating interest rates versus the prior period and maturing cheaper fixed interest rate swaps rolling off this half. We announced a distribution of AUD 11.20 per security, which includes a one-off distribution of AUD 2.10 to aid investors with paying capital gains tax in relation to the sale of assets to the Logistics Partnership. Excluding the one-off distribution, the payout ratio was 77.3%, within our target range of 75%-85%. Turning to page 10, we see gearing reduced through capital recycling during the first half. The vending of assets into the Logistics Partnership, sale of 3 Millennium Court in Victoria, and sale of our stake in Dexus Industria, released AUD 335 million of capital.
The release of capital was a key driver in the reduction of our gearing to 38.8%, pro forma for the settlement of the Logistics Partnership transaction, for which three properties settled in January 2025. This leaves us with a comfortable 33% asset value buffer to our loan-to-value covenant despite an extended period of cap rate expansions. Turning to page 11 now, strategic capital management has seen us end the period with undrawn debt of over AUD 600 million, well in excess of our AUD 200 million of debt maturing in FY 2025. During the half, we also took advantage of favorable market conditions to enter AUD 230 million of interest rate swaps, locking these in across 3.6 years at a weighted average fixed rate of 3.5%. Fixed debt was up to 92%, providing a high degree of visibility to this cost in the short term.
However, there was AUD 200 million of fixed debt rolling off in March, which also provides the group further exposure to the cut in interest rates announced by the RBA this week. We also extended net AUD 225 million of bank debt facilities, including a new AUD 125 million sustainability-linked loan, which takes the total of these facilities up to AUD 1.15 billion, indicative of the strong sustainability credentials of the group. With that, I'd like to hand over to Michael to cover off on our portfolio of directly held high-quality assets.
Thank you, Dion. Slide 13 provides a snapshot of our directly held portfolio, where the team's asset management expertise has again been demonstrated with significant leasing across both our office and industrial portfolios. The group concluded 19 new leases, equating to 8% of portfolio income. Pleasingly, the average lease term of the new leasing was 9.4 years, and as a result, the portfolio weighted average lease expiry has increased to six years. We had a 71% tenant retention rate across the half, up 8% compared with FY 2024. Our focus remains heavily on driving income growth and maintaining high occupancy across our portfolio by the active asset management of our properties. We have high-quality portfolio with 80% of our income being derived from listed companies and government tenants. Turning to slide 14, we have 6% of our portfolio income currently vacant.
We have a strong track record of leasing approximately 14% of portfolio income annually, and with specific initiatives underway to lease key vacancies, we are confident in our ability to execute on the current vacancy. We have continued the leasing momentum of the first half in the post-balance date period, with an additional 1.4% of portfolio income agreed in either executed leases or under heads of agreement. Turning to slide 15, throughout the half, we have actively undertaken strategic property divestments or above book value, including the sale of 3 Millennium Court logistics asset in Victoria and the establishment of the Logistics Partnership with our global capital partner, TPG Angelo Gordon. These capital recycling initiatives have generated a 13% property-level internal rate of return, and in line with our strategy, has facilitated the growth of new funds and partnerships.
Moving to slide 16, which emphasizes the quality of our highly green-credentialed modern office portfolio. The 5.2-star average NABERS energy rating is particularly appealing to both our government tenants, where we derive 42% of our office portfolio income, and our corporate head office tenants, which account for 52% of the balance of the office portfolio income. The office portfolio valuation declined AUD 2.6 billion over the half, representing a 4.7% on a like-for-like basis decline. An improved result compared with previous periods as yield expansion was less pronounced and market rental growth was recorded across the majority of Growthpoint's office markets. Turning now to slide 17, we have continued to see excellent leasing success across our office portfolio, leasing close to 14,000 sq m across 17 leasing transactions. Over half of this leasing was undertaken across our Victorian office assets.
An average new lease term of 5.7 years indicates businesses' willingness to make meaningful commitments to office space. We've been focused on repositioning key office vacancies throughout the portfolio via carefully considered capital investment. The benefit of this activity is clear in the leasing results, with 65% of new leasing occurring within repositioned office spaces. Slide 18 illustrates that the demand-supply equilibrium in the office market is likely to shift meaningfully in the medium term. Construction cost pressures are restricting new supply. Economic rents are substantially higher than prevailing passing rents. This is translating to a greater propensity for sitting tenants to renew leases. We saw this over the half, renewing five of seven lease expiries with sitting tenants.
Total square meters of office space occupied across Growthpoint's office markets is up 6% over the last five years, demonstrating a continued increase in demand over a tumultuous period for the office sector. With limited new supply in the pipeline, upward pressure on office rentals has commenced and is likely to prevail. Moving to slide 19, our industrial assets are well located, proximate to transport hubs and population centers. These linkage attributes are incredibly appealing to our high-quality tenants. 70% of our industrial portfolio income is derived from listed companies. The valuation of the industrial portfolio increased by 1.5% on a like-for-like basis over the half, with the increase principally being driven by the Woolworths Perth Airport new lease, which I will discuss on the next slide.
The weighted average cap rate for our industrial portfolio is now 6.1%, and there is an expectation among market participants that we are now at the end of the cap rate expansion cycle for industrial. Turning to slide 20, through the half, we completed over 100,000 sq m in industrial leasing, equivalent to almost 19% of our industrial portfolio income, with an average lease term of 10.9 years. Positive industrial leasing spreads of 24% will help drive portfolio income in the future. During the half, we agreed an expansion of the Perth Distribution Center with Woolworths, which will increase the gross lettable area by over 13%. The lease will be extended by 10 years from practical completion of the expansion, which is expected in late 2026. This is the second major expansion we've undertaken with Woolworths in the last five years.
The combined investment of approximately AUD 100 million demonstrates our commitment to partnering with our tenants to deliver for their businesses. This commitment to our tenants has underpinned our success in the past and is a key part of our strategy going forward. With that, I would like to hand over to Ross to speak to our funds management business and the momentum created in the half.
Thank you, Michael. Turning now to slide 22, Growthpoint entered the funds management business in late 2022 through the acquisition of Fortius Funds Management. The Growthpoint business was renamed Growthpoint Funds Management in 2024 and is fully integrated. Operating in our chosen sectors of office, industrial, and retail, and with a relatively even split of institutional and wholesale syndicate capital, the platform is positioned to take advantage of opportunities in an improving market. That positioning has paid off in the first half. If you turn to slide 23, you can see that we have created AUD 288 million of new assets under management through the half through two new funds, which we mentioned earlier in the presentation.
First, the Growthpoint Australia Logistics Partnership is an industrial funds partnership established with global asset manager, TPG Angelo Gordon, which saw AUD 181 million released to Growthpoint through the sale of 80% of six directly held industrial assets into the venture. Second, the Growthpoint Canberra Office Trust, in which we launched a wholesale investment opportunity to acquire a AUD 90 million office building in Canberra. Through these initiatives, we've increased our total number of funds to 11 and increased our total co-investment to over AUD 34 million from just under AUD 3 million at the 30th of June. Our strategy is to grow through funds management by partnering with like-minded investors to be their trusted partner, and our recent transactions demonstrate momentum for this strategy.
Turning now to slide 25, in one of the key pillars of our strategy, which is sustainable future proofing, we achieved an increased GRESB score of 85, exceeding the peer average of 76 and ranking second in our peer group. We've maintained high NABERS ratings with a 5.2-star energy, 4.8-star water, and a 5-star indoor environment rating. Our long-standing commitment to sustainability is a key differentiator for Growthpoint. These sustainability ratings are essential to capture and retain the quality of tenants that Growthpoint partners with. Turn to slide 26 and the summary of key sustainability actions. Our focus has largely been on environmental sustainability, and this is reflected in our achievements through the half. We've increased our GreenPower coverage to approximately 75% across our directly managed, operationally controlled office portfolio. We installed solar capacity and electric vehicle chargers at four additional assets.
Finally, on our path to net zero, there is less than AUD 250,000 of expenditure remaining to achieve our net zero target by 1 July 2025, reflecting our commitment to climate sustainability. Moving to slide 28 and our priorities and outlook. Key trends in the market underpin our optimistic outlook. Fundamentally, we believe the key driver for all forms of real estate will be population growth. The Australian population is projected to grow by 4.1 million people over the next decade, which, following the CBRE estimates, implies additional demand of over 18 million sq m of logistics space and more than 3 million sq m of both retail and office space. After 15 months of static interest rates and almost three years following the start of the last hiking cycle, we've now seen the first cut in a change in direction for rates.
With the market pricing further cuts this calendar year, we're expecting improved confidence in the market. Increasing transaction activity will provide investment and capital recycling opportunities. With persistently high construction costs, we expect that previous oversupply will reduce as new construction slows while the Australian population continues to grow. Turning to slide 29 and our pathway to growth. This is a three-pronged approach implemented in parallel, which draws upon our strategic pillars of portfolio performance, growth, efficient allocation of capital, and sustainable future proofing. First, enhancing our capital position. We will continue actively managing our directly held portfolio to deliver a stable income base, and we'll enhance our capital position to allow us to act on opportunities when they arise. In the first half, this is reflected in the release of AUD 335 million of capital and the reduction of gearing below 40%.
Second, we will source and execute capital partnerships both through wholesale syndicates and institutional partnerships. In the first half, we demonstrated great momentum with the establishment of the logistics partnership with TPG Angelo Gordon and the successful establishment of the Growthpoint Canberra Office Trust. And finally, we will continue to build scale in our core asset classes of office, industrial, and retail. We have now established a sector-aligned asset management model, and through this, we will build both our reputation and scale in these asset classes, demonstrating our capability through the performance of our existing assets and capitalizing on future opportunities with asset creation. Finally, turning to slide 30 and guidance. As momentum builds, we maintain our FY 2025 FFO guidance range of AUD 0.223-AUD 0.231 per security. We also reaffirm FY 2025 distribution guidance of AUD 0.203 per security, which includes the one-off distribution of AUD 0.021.
I'd like to thank our team for their continued hard work, and I'd also like to thank our tenants and our investors for their ongoing support of the business. Thank you for your participation today. I'd like to open the line for questions either online or via the call, and I ask that any questions in the first instance are directed to myself. Thank you.
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 are on a speakerphone, please pick up the handset before you ask your question. Today's first question comes from Ben Brayshaw with Barrenjoey. Please go ahead.
Good morning, Ross. Thanks for the presentation. I was just wondering if you could provide some color around the strategy for capital release as it relates to the Metropolitan Office portfolio. Do you see partners being introduced into this part of the business, or is this something that potentially could entail more of a tilt towards outright divestment?
Thanks for the question, Ben. I think the reality is at the moment, office liquidity is still constrained, and it's an avenue that I think we'll definitely explore over time as to how to bring partners into those assets. In the short term, the capital that's coming into the market for office is really gravitating towards CBD. So to answer the question on capital release, we're continuing with the opportunities to recycle the portfolio. We saw examples of that through partnering in logistics and outright divestment of logistics as well. But in the short term, I think it's unlikely you'll see partnering on office, but it is a medium-term aspiration.
Just to reference Michael's comments in the presentation on the capitalization rate decompression cycle coming to an end for logistics, how are you seeing that in relation to the Metropolitan Office market? I was just wondering if you could comment on whether there's any transaction evidence of pretty much, I think you just alluded to that there's not a lot of activity that valuers have to, so to speak, hang their hat on. Just, I guess, your opinion or your views on the valuation risk for Metropolitan Office, if you could, please.
Sure. Look, I'll talk to our portfolio specifically first, and then I might hand over to Michael for any more comments. But we've seen our portfolio decline from peak to current valuations of about 23%. So we've had a meaningful debasing of that office portfolio. Our weighted average capitalization rate for office, I think, is sitting about 6.8% or thereabouts. And I think it's probably important to look at that with and without our ultra-long weighted or premium asset. And excluding that, our weighted average cap rate is closer to 7.2%. So I think that's got a meaningful spread from where peak rates were and also a meaningful spread to where current cash rate and long-term bond rates are sitting. I think, as I said, the liquidity is challenged still for office.
We've seen a meaningful pickup in the Sydney CBD, and we expect that to permeate out into other markets over the next 12- 18 months. You're attracting nearly AUD 4 billion in the financial core of the Sydney CBD in the last 12 months, but there isn't a weight of evidence as such for the new Sydney and fringe office markets in Australia. I don't know if you've got any other comments, Michael, on transactions.
No. I mean, I think you can look at certain examples in Melbourne Street. For example, 655 Collins Street, which was sold late last year, they had 14 bids on that property, so you are starting to get some demand moved back even into the Melbourne office market, but there have been poor city sales. There's been decent transaction evidence in Brisbane and Canberra and other markets, which is probably where you've seen the faster-moving expansion in the yield market, and I would anticipate that those markets are at or about the point where they're going to stay, whereas there's less transaction evidence other than the recent deal in Collins Street to sort of point to in Victoria, but you can see from the evidence of 14 bids that there are going to be more people who are likely to participate in Melbourne over the coming couple of months.
Terrific. Okay. Thanks, Ross. Thanks, Michael.
Thank you. Your next question comes from Adam West at JP Morgan. Please go ahead. Adam West, your line is now live. You are welcome to re-register. We'll move on to our next question from Edward Day at MA Financial. Please go ahead.
Yeah, Ross and team. Just quickly on your guidance, you've kept a range, just given where we are in the fiscal year. What are the key swing factors there for you?
I might pass it on to Dion to comment on the guidance. Ed, thanks.
Yeah, thanks, Ed. Look, you'll note that the guidance range would see a decline from our first half FFO to our second half if we were in the midpoint of the range. Really, what we're looking at there is the transaction fees in the first half from the launch of two new funds. We're not baking anything in for the second half. And then you've got your usual swings and roundabouts. There's still some leasing to do. We've got some probabilities and expectations in our forecast around that, but it's really the big swing factor is those transaction fees.
Okay. And then just secondly, I think you've got ANZ as an expiry next year. Just any color you can provide on that, please.
Yeah, Michael might take that.
Yeah, thanks, Ed. We're in discussion with ANZ at the moment about their future requirements for that sort of 10,000 sq m that they occupy down at Collins Street. We haven't got a definitive guideline as to what they're doing. They are doing quite a bit of work within their Docklands occupancy at the moment. And we're confident in our ability to sort of position that space if they do leave to lease it up in an appealing fashion to the market.
Okay. Thank you. That's all.
Thanks, Ed.
Thank you. Your next question comes from Callum Bramah at Macquarie. Please go ahead.
Morning, team. Just a couple of ones. Actually, following on from the prior question where it was going, I think, if I'm right, the second half, because you've obviously reported the first, the implied guidance spread in the second half is, I think, a touch over 7%. I just wondered if you can kind of help narrow it in at all. I mean, you went through, I guess, the pieces that moved from first half to second half. I get that, but it's quite a wide range then as you go into the second half of the year.
Yeah. I think the primary thing, Adam, as we spoke about, is the movement in transaction fees. And we had a lot more momentum in the, I guess, for our initial guidance, it was front-ended where those transactions occurred with both Logistics Partnership and Canberra. And that had both the transaction fees, and albeit not significant, also the fee revenue from the Mid City Centre contract that also expired late in the first half. So, we have the discontinuation of that revenue coming through, as well as front-ending of transaction-related revenue on new funds.
The opportunity is there for us to continue to create those funds in the second half, but we're also mindful they do have a gestation period that's more than a few weeks to bring to life. And we're focused on bringing the right opportunities to our investors as well. So hopefully, that swing will move the other way, but we haven't baked that into the remaining guidance.
Correct me if I'm wrong, sorry, but so in the second half, the implied spread in what remains, is it the potential for transaction fees on the upside and the downsides really just baked in as in? Because I would have thought now, given where you are, you'd have quite good visibility on what your earnings are going to be for the second half.
Yeah. As I said to Adam, it's largely driven by those variable transaction fees.
Okay. Thanks. That's good. And then the other one was just in relation to that office expiry profile. Of those large expiries, do you have any knowledge on definitive moves for any of those key expiries? As in, have you been told by any of them that they are intending to leave?
I don't know.
Yeah, I think that's probably best to Michael.
No, we haven't had any definitive guide on those expiries that they intend to leave. So the two larger ones for next financial year are ANZ and Monash University, and we're in discussions with both of them. I'll also note that both those expires on March and April 2026, so they are some time away.
Yes. Perfect. And apologies, did I hear correctly on the call? And maybe really the question is, what do you see the level of underrenting in your industrial portfolio at the moment?
It's about 12% at the moment. It wasn't on the call, but that's what the number is.
Yeah. I said that 24, and I think I misheard.
No, that was the leasing spread on the deals that we did.
Thank you. And then my last one was just looking at the funds growth, which is fantastic. I'm just wondering whether or not you've got the existing resources in place to really drive that further, or you feel like you have to build it out more? From a standpoint, I meant. Sorry.
Yeah. I think we've got a lot of the core infrastructure in place. So, I think to scale to the next level of growth for us won't require the same amount of additional resource relative to the fund that will come on. So the core infrastructure is in place, the executive team's in place, the baseline infrastructure is there. We've been continuing to build out capability as well over the first half of the year. So, there should be an opportunity to scale our revenue beyond our cost line as we go forward.
Thank you very much.
Thank you. Once again, if you would like to ask a question, you can register by pressing star then one on your phone and waiting for your name to be announced. Your next question comes from Solomon Zhang at JP Morgan. Please go ahead.
Oh, hi, team. It's Adam West here from JP Morgan. Apologies for earlier. I was having some technical difficulties there. Just a quick one on the office incentives. They've sort of ticked up about 10% in the half, so could you just chat through a few of the drivers there, and do you sort of see that normalizing or stabilizing at that level?
No. I'm not going to say that one, Ross. They were sort of it was a bit skewed in the prior period because we had one large office transaction. I can't tell you which one it was where there was no incentive implied, so that's why they were sort of lower than where the market level is. I think the average office incentive is about 33% at the moment across our portfolio, which is below where some markets are trending, so outperforming there, but yeah, they are slightly higher than the prior period, but principally because of one deal skewing it from the prior period.
Yeah. That's clear. And I guess just with your discussions with tenants in office, are you sort of having any discussions of them taking more space, or are they sort of taking a similar amount of space? You could probably provide a bit of the color there.
Yeah. No.
I might grab it. I'll grab it. I think the overarching theme we're getting when we're talking to our tenants at the moment, and we've been doing a lot of it over the past six to eight weeks, is the number one issue in their business is return to work. It's a universal theme that is coming through loud and clear to us. And the next thing that sits behind that is, in many cases, the inadequacy of their current footprint to accommodate a full 100% of work. So, I think there's still a bit of a tension point in people making the decision to up the floor space requirement, but it's certainly the tension point is there, and I expect to see it play out over the next 12 plus months.
Just to add a bit of color to recent transactions, for example, one of the larger leases we did in the half, that business is already wanting to expand by 40%. Within two months, they are taking an additional 40% space.
Yeah. That's clear. And I guess just one final one for me. But in the first half, were you guys impacted at all by lease surrender payments? And if so, could you just provide a bit of a quantum around that?
Dion, do you want to take that?
Yeah. Nothing material in the first half at all.
Perfect. Thanks for that.
Thank you. We are showing no further questions at this time. I'll now hand back to Ross Lees, our CEO and Managing Director, for closing remarks.
Thank you, everybody, for joining today and for your engagement, and we look forward to seeing you all over the coming weeks. Thank you very much.
Thank you. That concludes our call for today. You may now disconnect your line.