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Edited Transcript of GOZ.AX earnings conference call or presentation 21-Feb-19 6:00am GMT

Half Year 2019 Growthpoint Properties Australia Ltd Earnings Call

MELBOURNE Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Growthpoint Properties Australia Ltd earnings conference call or presentation Thursday, February 21, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Dion Andrews

Growthpoint Properties Australia - CFO & Company Secretary

* Michael Green

Growthpoint Properties Australia - CIO

* Timothy James Collyer

Growthpoint Properties Australia - MD & Director

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Conference Call Participants

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* Benjamin J. Brayshaw

JP Morgan Chase & Co, Research Division - Analyst

* Darren Leung

Macquarie Research - Analyst

* Stephen Lam

CLSA Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Growthpoint Properties Australia Half Year Results Announcement 2019. (Operator Instructions) I would now like to hand the conference over to Mr. Timothy Collyer, CEO. Please go ahead.

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [2]

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Thank you. I would like to start by welcoming everyone on the call and on the webcast to Growthpoint Properties Australia's Results Presentation for the First Half of the Financial Year 2019. With me today are members of Growthpoint's executive management team, Dion Andrews, our CFO; Michael Green, CIO; and Yien Hong, General Counsel and Company Secretary.

The format for today's presentation is that I will start with an overview of the results, detailing some of the key highlights over the half. I'll then pass to Dion to go through some areas of interest with respect to the financial management. Following that, I will close with some comments about the group's property portfolio, strategy and outlook.

Turning to Slide 4. It was a busy half year with in excess of $500 million worth of acquisitions, developments and expansions announced, spanning both office and industrial property. Whilst risks are emerging across some sectors of the Australian property market, we believe the outlook for office and industrial property relating to high-quality tenants is positive. Attractive yield spreads to funding costs, low vacancy rates and improving market rents, particularly in Sydney and Melbourne, drove significant transactional activity in 2018, with over $41 billion of commercial property changing hands.

Australian office market continued to attract significant volumes of capital whilst industrial remains the favored sector globally, benefiting from growth in online spending. Growthpoint produced a solid financial performance over the half year, delivering FFO of $0.125 per security and a distribution of $0.114 per security, which is 3.6% higher than the prior corresponding period. The half year marks the 14th consecutive period Growthpoint has grown its distribution payments to securityholders, with earnings growth outpacing distribution growth over the same period.

Acquisitions over the half drove the group's weighting towards office to 69%. We still consider industrial a key sector for investment, with drivers of demand for logistics remaining largely positive, with solid export levels, strong population growth and continued growth in e-commerce retailing. Constrained land supply and improvements in key infrastructure are contributors to rising industrial values.

NTA growth was outstanding over the half year, increasing by 5.3%. And gearing remains at the bottom of the group's target range of 35% to 45%. Dion will provide more details on these 2 items in a moment.

Turning to Slide 5. And we completed 2 significant direct property transactions over the half year. The first was the acquisition of 836 Wellington Street, West Perth in Western Australia for $91.3 million. This is Growthpoint's first office acquisition in Perth and came after several years of due diligence and researching for Perth office market, which we believe is in a recovery phase. We also completed the acquisition of 100 Skyring Terrace in Newstead, Brisbane for $250 million. The property was constructed in 2014 and is fully leased with 2 ASX-listed major tenants, a 7.5-year (sic) [7.4-year] weighted average lease expiry and attractive rental escalations.

The building has high green credentials with a 5.5-star NABERS energy rating. The acquisition was accretive to the financial year '19 earnings and led us to upgrade our FFO guidance to at least $0.248 per security for the full year. The acquisition was partly funded by a $135 million rights offer, which achieved oversubscriptions for both the retail and institutional components of the raising. At yesterday's close, the newly issued securities achieved the 20.3% return since late last year. These acquisitions consolidated Growthpoint's position as the largest metropolitan office owner in the A-REIT sector.

Slide 6. Slide 6 highlights recent development and expansion opportunities progressed by Growthpoint. In July 2018, we broke ground on the development of a new 19,300-square-meter office building at the Botanicca Corporate Office Park in Richmond, Victoria. The development is tracking ahead of schedule with completion expected in the first half of 2020. And we are receiving strong engagement from a number of prospective tenants against the backdrop of historic-low vacancy rates in Melbourne CBD and city fringe.

In January 2019, we welcomed the opportunity to partner with Woolworths, Growthpoint's largest tenant, in the expansion of one of their key distribution centers at Gepps Cross, South Australia. Growthpoint is funding the $57 million development and will receive a coupon for the project costs as they are incurred at a yield of 6.75% per annum. Upon practical completion in mid-2020, the lease over the entire property will reset for 15 years.

As part of the transaction, Growthpoint has agreed to a shorter lease term at 120 Northcorp Boulevard, Broadmeadows in Victoria. The reduction in lease term is expected to amount to 10 months at the most but could be as low as 4 months, depending on the exact timing of Woolworths' departure. The new leasing arrangements at Broadmeadows provide an opportunity to explore development options at the 25-hectare zone, which currently has a lower site coverage of less than 25%. We are also actively canvassing the market for large occupiers who can lease the existing facility with significant plan for future expansion.

Our relationship with Woolworths across multiple sites was a factor in achieving what is an excellent result for both parties. And we look forward to working with Woolworths on the Gepps Cross expansion and supporting their plans for future growth.

I'll now hand over to Dion to discuss the financials.

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Dion Andrews, Growthpoint Properties Australia - CFO & Company Secretary [3]

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Right. Thanks, Tim.

Turning to the financials on Slide 8, it has been another solid result for the group in the first half, driven by income growth from new property acquisitions, higher occupancy and a lower all-in cost of debt. This has enabled us to pay a distribution of $0.114 per security, up 3.6% on the prior corresponding period. This is in line with the group's target of 3% to 4% distribution growth over the medium term. Amortization of incentives was higher as a result of incentives paid on leasing completed in FY '18. The half year '19 amortization amount is expected to be broadly the same in the second half of the year. And we expect it will stabilize in FY '20 at levels largely consistent with FY '19.

Net finance costs were reduced through the refinancing of debt facilities with lower costs. Higher control of overheads also saw a reduction in the management expense ratio, down to 38 basis points in calendar year '18 from 40 basis points from calendar year '17.

FFO increased 5% on the prior corresponding period as a result of new acquisitions. Or FFO per security was flat as a result of higher shares on issue following a rights offer in December 2018.

The payout ratio of 95.8% was elevated in the first half as a result of new shares issued under the rights offer being entitled to the full, half year '19 distribution. Assuming only a pro-rata entitlement to the first half distribution for these securities would have resulted in the payout ratio of 91.6%.

On Slide 9, we detail some of the key items influencing gearing over the half year. Gearing in place contributed 35%, remaining at the bottom of the group's target range, with property acquisitions over the half year partially funded by equity raised by the distribution reinvestment plan and rights offer. Positive revaluations over the half resulted in a 0.9% reduction in the overall gearing level. Our all-in cost of debt fell to 4.1% from 4.4% at 30 June 2018, as we utilized undrawn debt and funded part of the acquisition of 100 Skyring Terrace via a low-cost bridge facility. Assuming current market conditions persist, management and the board expects to maintain gearing towards the lower end of the group's target gearing range in the period ahead.

Turning now to Slide 10. It was another strong half of net tangible asset growth. NTA per security rose to $3.36, an increase of 5.3% over the half to 31 December 2018. This follows an increase over the financial year '18 of 10.8%. The key driver of the increase this period was again property revaluations, which benefited from 21 basis points of cap rate compression; improved market rents, particularly in metropolitan Sydney and Melbourne; and strong leasing outcomes for the group with higher occupancy and good tenant retention during the half. Another key contributor to the uplift was the rights offer, which was completed at an 8.5% premium to the 30 June 2018 NTA.

Turning to Slide 11, we see the group's debt capital is in a sound position. Growthpoint retains good assets and debt through both local banking relationships and offshore debt capital market. We recently extended $515 million of debt for domestic institutions. The savings is made of margins in all major domestic banks submitting proposals. A bridge facility was put in place to help fund the 100 Skyring Terrace acquisition in December 2018, and this is expected to be replaced by an additional debt capital market issuance prior to 30 June 2019. Our earliest debt expiry is February 2020, and the group continues to look at all available debt markets for the best possible funding structure.

At 31 December 2018, we had undrawn debt lines of $244 million, which will be partly utilized to fund the ongoing construction of the new Botanicca 3 office building and expansion of the Woolworths Distribution Centre, where construction commenced today.

Growthpoint also has good demand for its equity. The December rights offer of $135 million oversubscribed on both the retail and institutional components. The historical take-up of the distribution reinvestment plan has been 76%. If this were to continue, the group's forecast FY '19 distribution would represent $127 million of new equity if we chose to utilize the DRP this year. This source of funding helps Growthpoint manage its gearing with $417 million raised from DRP in June 2012.

To summarize. During the half, FFO guidance was upgraded to at least $0.248 per security. Accretive acquisitions during the half, combined with the reductions in the all-in cost of debt, has positioned us well for future growth. Our access to equity is sound, as evidenced by the strong securityholder support following the recent rights offer. And the balance sheet is in good shape with substantial headroom and debt covenants and gearing at the bottom of our target range.

Thank you, and I'll now pass back to Tim.

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [4]

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Thank you, Dion.

To Slide 14. And we continue to benefit from the portfolio, which has been deliberately weighted towards the favored property sectors of office and industrial. And we believe these trends of outperformance will continue. Transactional evidence suggests we'll continue to see investor appetite for well-located office assets along Australia's Eastern seaboard. And from a leasing perspective, appetite for office space is strong, with Melbourne and Sydney office space vacancy rates at historic lows, whilst industrial remains the favored global property sector.

It is pleasing to report that portfolio occupancy has returned to 99%. Occupancy in the portfolio has been about 97% since Growthpoint's inception nearly 10 years ago. 80% of Growthpoint's income is derived from listed and government tenants. And the weighted average rent review of 3.3% per annum continues to underpin Growthpoint's 3% to 4% distribution growth targets.

Moving to Slide 15. On Slide 15, we provide a further detail around our key tenants, which is being bolstered by further federal government tenancy and the addition of Bank of Queensland during the half year. The focus in 2019 will be around renewing major financial year '20 expiries, with work well progressed at a number of key properties.

Like-for-like net property income was 3.1% higher on an FFO basis and 1.8% higher after including amortization of leasing incentives. Like-for-like growth of 2.6% in the industrial portfolio was consistent with the industrial portfolio weighted average rent review of 2.8%, while the office portfolio is impacted by reversions of 2 properties.

To Slide 16. Our business model has been consistent since 2009. We seek to run quality commercial property in proximity to major transport and infrastructure, building the portfolio through direct acquisition, M&A and developing to enhance our existing assets. This strategy of owning well-leased, well-located commercial property is one that is serving the business well and [has delivered] outperformance in total return to securityholders over the short- and long-term time periods.

Over the remaining months of the financial year '19, we will continue working on upcoming lease expiries, with good progress already made on renewing existing tenants and marketing to new tenants at our Richmond development.

Our balance sheet is well positioned, with gearing at the bottom of our target range. In the near term, we will look to replace the bridge debt facility with additional debt capital markets issuance, further diversifying and extending our debt profile should market conditions be conducive.

We are progressing with several solar projects, and we're in the process of reviewing other sustainable energy solutions, which will lower energy costs for our tenants and build on our strong 4.6 Star average NABERS rating and make our buildings more attractive for the highest-quality tenants.

Our view on retail property is unchanged. While we have a mandate to invest in retail property, we've made a deliberate decision to avoid the sector at this time due to growing structural headwinds facing retailers.

Finally, to the last slide. It was another strong half for Growthpoint, putting us strongly on track to deliver our upgraded FFO guidance of at least $0.248 per security and distributions of $0.23 per security. While the economy [gets slowed] and the outlook is less certain than it was 6 months ago, we believe we are well positioned to capitalize on opportunities in the portfolio and in our favored office and industrial sectors, delivering on near-term leasing requirements and continuing growing distribution to securityholders.

Thank you, and we will now hand over to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Darren Leung from Macquarie.

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Darren Leung, Macquarie Research - Analyst [2]

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Tim, just a few quick ones from me. First one, on Richmond, have you had any sort of solid leads in terms of leasing here?

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Michael Green, Growthpoint Properties Australia - CIO [3]

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Darren, it's Michael Green here. Well, yes, the development has been really well received at the moment. The tenant community and tenant representative community, they favored again through a number of proposals that they are asking us for. I think that may deliver uncertainty of producing a building as opposed to just adding like planning improved developments being a good strategy for us. I mean, it's going on, the construction has been great, (inaudible) and progressing development well. And overall, the design and the price point are attractive. So whilst we don't have any tenants to announce right now, we are in discussions with a number of them.

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Darren Leung, Macquarie Research - Analyst [4]

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Okay. When should we expect, I suppose, a level of pre-commitment at this building? Is there something -- is there like a time frame that you're working to? Or...

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Michael Green, Growthpoint Properties Australia - CIO [5]

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I'd like to say as soon as possible, but I don't have any explicit dates to give you.

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Darren Leung, Macquarie Research - Analyst [6]

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Okay, no problem. Second one was around retail. Tim, so you mentioned structural headwinds facing retailers, et cetera, et cetera. Given what's happening to retail valuations more broadly, yes, I mean, at what point does retail start to look attractive and meet your return hurdles?

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [7]

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Not for a while, I would've thought. I think if we look back quite a while ago, the hierarchy of cap rates was retail with allowance and consistent performer over long term. If you [were to piece PTA,] our returns, it was retail, office, industrial: retail, lowest yield; office in the middle; industrial, the highest. Prior to GFC and the advent of Internet sales, that has flipped around the other way. And I believe the hierarchy of the cap rates is changing, and there's not a big enough differential between industrial, office and retail yields as yet, over the differential point of view but also for the growth in the rent from retail assets, the cap rates aren't high enough. So to answer your question, we'll monitor it and review it. But at this point in time, broadly speaking, we don't see a long-term value there, not just value in 6 or 12 months, going forward long-term value, so we don't quite (inaudible).

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Darren Leung, Macquarie Research - Analyst [8]

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What yield differential would you look for perhaps, retail versus office, as an example?

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [9]

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That's hard to say. It's hard to say.

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Darren Leung, Macquarie Research - Analyst [10]

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Okay. And then just final one, just sticking to sort of return hurdles and sort of entry and exit points, just perhaps with respect to your return on ADI. So obviously, it performed really well compared to most of your direct property investments. I mean, at what point do you start to crystallize or realize this return for your unitholders?

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [11]

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I think you asked -- but did you ask this similar question 6 months ago? So I mean, it has achieved reasonably good returns, but I would say that owners are reinvesting in the office and in industrial markets also returned well. So that's an [$18 million] investment. We haven't determined anything about the disposal or the acquisition or what have you. We're just reviewing the results over the next week or so. We haven't had the opportunity to do that. And we've sort of don't have anything on hand specifically on ADI. It's producing a good yield for securityholders. And when it's appropriate to make a decision about it, we'll do so.

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Darren Leung, Macquarie Research - Analyst [12]

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Yes. I mean, you're right. I did -- I'm pretty sure I asked the similar questions 6 months ago, but 6 months ago, the share price was $2.60. And so there's been a strong mark-to-market since then. I would've thought crystallization would've been around here.

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [13]

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Okay. Well, as I said, we'll just review our results and discuss with the investment at a later phase with the board. But nothing in our strategy has been defined for ADI.

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Operator [14]

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Your next question comes from Ben Brayshaw from JPMorgan.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [15]

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Firstly, just a comment rather than a question. Congratulations on the repositioning of the Gepps Cross building in Adelaide.

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [16]

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It's a good deal and the long-term income of that particular asset has been shorter. So another 15 years from the middle of 2020. So it's the great view from our securityholders.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [17]

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Just on Gepps Cross, Tim, could I just get your thoughts on how the new rent is going to be determined for the lease when the lease commences? Will it be based on the coupon of the 6.75% on the value of the work? Is there another way of determining the rent?

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [18]

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They're in...

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Michael Green, Growthpoint Properties Australia - CIO [19]

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Portion of them.

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [20]

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Yes. So we have the existing rent of the existing facility, and that continues on. I think there was one 2.5% rent review for one. We continue the existing rents. We forego one rent review on the existing rents. And then we add $57 million by 6.75% to get the rent for the expansion. And when you add those together, and then price to completion less rent and escalate at 2.5% per annum for 15 years, which is the same escalator in all our Woolworths projects going on.

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Michael Green, Growthpoint Properties Australia - CIO [21]

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Yes, Ben, the blended rate is just slightly over $100 per square meter, from recollection, [for that market].

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [22]

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Yes, okay. And the variation of the lease at Broadmeadows, you mentioned 4 to 10 months, could see the lease expiration date terminated or canceled prior to the current expiry. Presumably that's related to the commissioning. Could you just talk through your current expectations on when you're thinking that, that expiry date might be brought forward?

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [23]

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No, because we've just negotiated it -- sort of the sale of it, and so we did negotiate that flexibility. To some extent, [were worse], so no, we have no visibility of what that might be at this time.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [24]

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Is there a notice period that you will receive prior to the lease being canceled?

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [25]

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Yes, there is. I just can't recall it off the top of my head.

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Michael Green, Growthpoint Properties Australia - CIO [26]

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I think it's 6 months, from memory, but we can turn that number up with you.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [27]

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No problem. And just on the operating cash flow, it has come in a little bit below the funds from operations for this period. Could you just talk about the key drivers of the shortfall in operating cash flow versus funds from operations, please?

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Dion Andrews, Growthpoint Properties Australia - CFO & Company Secretary [28]

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Well, the payout ratio, the distribution to funds from operations, is that what you're referring to, sir?

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [29]

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No, Dion, it's the cash flow from operating activities of $54.5 million versus the funds from operations of $86.5 million.

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Dion Andrews, Growthpoint Properties Australia - CFO & Company Secretary [30]

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Yes.

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [31]

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Just what explains the difference, if you don't mind.

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Dion Andrews, Growthpoint Properties Australia - CFO & Company Secretary [32]

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I mean, the operating net cash flow from the cash flow statement and the funds from operation of $86 million, yes?

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [33]

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Yes.

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Dion Andrews, Growthpoint Properties Australia - CFO & Company Secretary [34]

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Okay. So the reconciling items are largely on Slide 8 for you there. We have obviously the add-back of amortization of incentives. But what is not on the cash flow is the incentives that, where we're paying rent free, some incentive amortization, you are simply not receiving net cash or rental abatement through the operating cash flow line. So that $54 million includes those incentives of cash that you're not receiving. Does that make sense?

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Benjamin J. Brayshaw, JP Morgan Chase & Co, Research Division - Analyst [35]

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Yes, it does. And do you happen to have the number off hand of how much rent-free incentives were expensed for the period?

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Dion Andrews, Growthpoint Properties Australia - CFO & Company Secretary [36]

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Not to hand. There is a slide on how it works, Slide 27 in the appendices of the presentation. So there's a reduction in cash generated by operating activities of $20.2 million as incentives were paid. So that's a reduction to your operating cash flow on the cash flow statement. And that's one of the main changes there, so that's the main reconciling item.

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Operator [37]

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(Operator Instructions) Your next question comes from Stephen Lam from CLSA.

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Stephen Lam, CLSA Limited, Research Division - Research Analyst [38]

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Tim and team, just a few questions. On the sale of the 2 small assets, assumed that's already in your guidance, but what's the dollar amount and the expected timing of that, please?

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Michael Green, Growthpoint Properties Australia - CIO [39]

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So they tie -- full circle around the book value for the dollar amount. And the sale is progressing reasonably well, but we've got no further things to update at this stage.

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [40]

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Stephen, that's Cambridge, Tasmania; and Bedford Park, those 2 assets. We should have something to announce in a period of time, but we can't do so at this point of time.

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Stephen Lam, CLSA Limited, Research Division - Research Analyst [41]

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Okay. And I think you were saying that the bridge facility for the new set of acquisitions was quite cheap. So when you go to capital markets or replace that debt, are you expecting that to lift your cost of debt? Or is it going to be fairly immaterial?

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Timothy James Collyer, Growthpoint Properties Australia - MD & Director [42]

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The difference between the bridge and the USPP costs.

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Dion Andrews, Growthpoint Properties Australia - CFO & Company Secretary [43]

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Yes, sure. Obviously, the bridge is adding a month's tenor, so it's quite a cheap facility for us. It's only meant to be short term. We have, as of 31 December and today, a 5-year swap as part of the overall debt transaction we're intending to do in debt capital markets. That's what was entered into for $150 million at the rate of 2.06%. So we'll now look to execute on the debt capital piece. Obviously, the rate will be higher all-in, but it's not going to have a material impact on our all-in cost of debt. It will increase slightly from the 4.1% but not in a material way.

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Stephen Lam, CLSA Limited, Research Division - Research Analyst [44]

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Okay. And what's the total CapEx guidance for the year in terms of the maintenance CapEx you have?

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Dion Andrews, Growthpoint Properties Australia - CFO & Company Secretary [45]

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We just guide at 0.3% to 0.5% of the average property value. We don't provide any other guidance apart from that.

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Operator [46]

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Thank you. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.