GROWTHPOINT AUSTRALIA (GOZ)

THE INVESTMENT IN GOZ

Growthpoint’s 65% share of GOZ performed exceptionally for FY15. GOZ was one of the best performing A-REITs in FY15 and delivered a total AUD return of 36.4% to Growthpoint. The distributions received from GOZ during the year amounted to R658 million.

Distributions from GOZ grew 28.3% in Rand, making a solid 15.5% contribution to Growthpoint’s overall distributable income, notwithstanding the weakening of the AUD against the Rand.

GOZ has grown significantly since Growthpoint’s initial acquisition in 2009. It has grown its market capitalisation to AUD1,8 billion and owns assets of AUD2,3 billion.

GOZ achieved the major milestone of becoming a component of the S&P/ASX200, which has seen a marked improvement in its liquidity and tradability, adding to shareholder value. Its share price increased from AUD2.45 to AUD3.13 at FY15. Growthpoint continues to support the growth of GOZ to improve the liquidity and tradability of the company’s shares and drive value enhancement for all shareholders.

During the year we invested a further R607 million in GOZ, by way of supporting the Distribution Reinvestment Plans (DRIPs), where Growthpoint elected to reinvest its distributions receivable from GOZ. Our shareholding in GOZ remained largely unchanged for FY15, ending the year at 65%.

It has been financially rewarding to support the growth of GOZ and we intend to continue to do this. It remains a good investment for Growthpoint and has delivered a total return of 31.9% in Rand terms. To date our investment in GOZ has cost a total of R5,9 billion and the market value is R10,9 billion.

During the year GOZ continued to invest in quality commercial Australian real estate. It acquired AUD119,5 million of office and industrial properties.

GOZ brought down its debt levels in line with its strategy. Its gearing was reduced to 37.0% at FY15 from 40.9% at FY14 — within its target range — placing it in a conservative financial position. GOZ maintained its Moody’s investment grade credit rating (Baa2), which was first issued in August 2014. GOZ’s reduction in gearing and credit rating enabled it to raise an AUD200 million 10-year bond and diversify its sources of funding. GOZ also reduced its cost of debt over the period from a weighted average interest rate of 5.8% at FY14 to 4.8% at FY15.

Although GOZ grew its distribution by 3.7%, the AUD weakened against the Rand and together with the increased level of withholding tax was detrimental to Growthpoint.

How GOZ offers Growthpoint and our shareholders value:

•	The size of our investment in Australia at a fair value of R10,9 billion is large enough to have an impact on Growthpoint without changing the nature of the company or exposing it to excessive foreign risk
•	It provides Growthpoint international diversification and exposure to a developed and stable economy that has prospered throughout the global financial crisis
•	It is a pure Australian investment with 53 properties located in all Australian states with good proximity to key infrastructure, particularly CBDs, ports, airports and major arterial road networks
•	It is a low-risk investment in Australia with most of its rental income coming from some of Australia’s largest and most stable companies.

MARKET ENVIRONMENT

Although vacancy rates remain elevated in most office markets in Australia, there has been an improvement in Sydney and Melbourne over FY15. Buyer demand for quality office and industrial property is still outstripping supply and is coming from A-REITs, domestic wholesale funds, superannuation funds, syndicators and offshore investors and this should support asset values particularly for assets like GOZ’s which are typically leased long-term to quality tenants. This strong buyer demand was demonstrated by the sale processes for the Investa office portfolio and the GIC/Australand industrial portfolio, which have reportedly sold for AUD2,45 billion and in excess of AUD1,0 billion, respectively. These transactions are expected to lead to further yield compression in the short to medium term.

Valuation increases arising from lower capitalisation rates are expected to continue in FY16 as demand to acquire well-leased, quality property continues to increase in Australia.

Although GOZ’s property portfolio saw a significant increase in valuations over the year, there remains further potential valuation upside.

GOZ VALUE BY GEOGRAPHIC DIVERSITY

PERFORMANCE

GOZ has completed its sixth year of growth in distributions, net tangible assets and security price.

GOZ owns an enviable AUD2,3 billion portfolio of modern, well-leased and well-located properties in every State of Australia, split 51%/49% between office and industrial. Other key features include a long weighted average lease expiry or WALE of 6.7 years, weighted average fixed rent reviews of 3.0% per annum, a high occupancy rate at 96.5% and only 6.0% of the portfolio leases potentially expiring over the next two financial years.

Following a mix of internal and external valuations, GOZ’s properties increased in value by AUD186.0 million over FY15 or by 9.0% on a like-for-like basis. This reflected a general increase in demand for the type of assets GOZ owns: modern, well-leased properties in excellent locations.

Like-for-like net property income growth was 1.0% for the portfolio for the six months to 30 June 2015 with office increasing by 1.2% and industrial increasing by 0.8%. A 0.1% increase was recorded on a like-for-like basis from FY14 with industrial increasing by 2.4% and office declining by 2.1%. The like-for-like decline for office was due to increased vacancy and tenant incentives for new or extended leasing.

Over 69 000m² of new and extended leasing out of a total portfolio of 1 050 611m² was undertaken in FY15. Whilst GOZ has achieved significant leasing success to date, the Brisbane office market remains challenging and this is where the majority of GOZ’s upcoming potential lease expiries are located. However, given that only 6% of the portfolio’s leases come up for renewal over the next two years, primarily within the industrial portfolio, and the excellent portfolio, GOZ is confident that it will maintain a high occupancy level over the short to medium term.

The existing portfolio was strengthened by AUD119,5 million of acquisitions during FY15, an AUD20,8 million acquisition in early July 2015 and the AUD26,7 million disposal of two non-core assets at or above previous book value. GOZ may look to divest a portfolio of assets in FY16 to take advantage of strong demand for property in Australia.

FY15 operating expenses as a percentage of average gross assets returned to its longer-term average of 0.4% versus 0.5% in FY14. GOZ expects its operating expenses to remain at this level in FY16.

PROSPECTS

GOZ continues to actively consider a number of development opportunities within its existing portfolio including:

•	The redevelopment of part of a Richmond site in Victoria for offices, subject to a precommitment being in place. A planning permit has been issued for construction of an 18 000m² office building. GOZ may also explore the potential for a residential redevelopment of part of this site
•	Tenant-initiated expansions at five industrial properties in Queensland and Victoria
•	The redevelopment or change of use of a 25 hectare site at 120 Northcorp Boulevard, Broadmeadows, Victoria where Woolworths has announced that it will be closing its facility. The lease of this facility currently expires in July 2021
•	A significant potential development of 522-550 Wellington Road, Mulgrave, Victoria should Woolworths decide not to renew its lease in July 2021. This 19.1 hectare site adjoins a large residential estate and offers long-term residential development opportunities subject to re-zoning
•	The other four distribution centres leased to Woolworths offer significant development potential should Woolworths require additional lettable area as these sites have low site coverage of approximately 30%.

Further potential valuation upside of property portfolio

Continue to actively consider a number of development opportunities within existing portfolio

Key performance areas

	FY15		FY14		Increase/ (decrease)
Gross property revenue (R’million)	1 844		1 617		227
Property expenses (R’million)	(213)		(196)		17
Net property income (R’million)	1 631		1 421		210
Property expense ratio (%)	11.6		12.1		(0.5)
Vacancies (%)	1.0		1.5		(0.5)
Arrears (R’million)	0,4		6,9		(6,5)
Bad debt provision (R’million)	–		1,0		(1,0)
Average gross rental (AUD per m2/annum)	188		192		(4)
Forward yield (%)	7.3		8.2		(0.9)
Average in-force escalation (%)	3.0		3.1		(0.1)
Weighted average lease period (years)	6.7		6.9		(0.2)
Asset value (R’billion)	22.0		20.9		1.1
Number of properties	53		51		2
GLA (m2)	1 050 611		1 036 740		13 871
Value (excluding bulk) per m2 (R)	20 963		20 120		843
Capital expenditure (R’million)	306		416		(110)

GOZ LEASE EXPIRY % OF GLA

GOZ LEASE EXPIRY % OF GROSS RENTAL

Sixth year of growth in distribution, net tangible assets and security price

Top 10 GOZ tenants

	Tenant	GLA* m2	% of total V&A GLA
1	Woolworths	406 941	39.1
2	NSW Police	31 954	3.1
3	GE Capital Finance Australasia	24 910	2.4
4	Linfox	58 077	5.6
5	Commonwealth of Australia – DEEWR	15 398	1.5
6	Jacobs Engineering	9 595	0.9
7	Energex	8 754	0.8
8	Fox Sports	8 092	0.8
9	Star Track Express	44 424	4.3
10	Downer EDI Mining	5 636	0.5
Total of Top 10		613 781	59.0

* Ranked in terms of gross monthly rental.

Top 10 GOZ properties by value

	Property name		Location	Value Rm		% of total GOZ portfolio		GLA* m2		% of total GOZ GLA
1	1 Charles Street, Parramatta		New South Wales	2 457		11.2		31 954		3.0
2	70 Distribution Street, Larapinta		Queensland	1 818		8.3		75 425		7.2
3	20 Colquhoun Road, Perth Airport		Western Australia	1 259		5.7		80 374		7.7
4	219-247 Pacific Highway, Artarmon		New South Wales	973		4.4		14 496		1.4
5	1231-1241 Sandgate Road, Nundah		Queensland	876		4.0		12 980		1.2
6	333 Ann Street, Brisbane		Queensland	855		3.9		16 490		1.6
7	10-21 Mort Street, Canberra		Australia Capital Territory	799		3.6		15 398		1.5
8	22 Cordelia Street, South Brisbane		Queensland	780		3.5		11 529		1.1
9	28 Bilston Drive, Wodonge		Victoria	756		3.4		57 440		5.5
10	572-576 Swan Street, Richmond		Victoria	738		3.4		14 660		1.4
Total of Top 10				11 311		51.4		330 746		31.6

International diversification and exposure to a developed and stable economy