U.S. markets closed
  • S&P 500

    3,298.46
    +51.87 (+1.60%)
     
  • Dow 30

    27,173.96
    +358.52 (+1.34%)
     
  • Nasdaq

    10,913.56
    +241.29 (+2.26%)
     
  • Russell 2000

    1,474.91
    +23.09 (+1.59%)
     
  • Crude Oil

    40.04
    -0.27 (-0.67%)
     
  • Gold

    1,864.30
    -12.60 (-0.67%)
     
  • Silver

    22.99
    -0.21 (-0.91%)
     
  • EUR/USD

    1.1639
    -0.0037 (-0.31%)
     
  • 10-Yr Bond

    0.6590
    -0.0070 (-1.05%)
     
  • GBP/USD

    1.2744
    -0.0007 (-0.06%)
     
  • USD/JPY

    105.5590
    +0.1570 (+0.15%)
     
  • BTC-USD

    10,728.55
    -32.04 (-0.30%)
     
  • CMC Crypto 200

    229.40
    +11.57 (+5.31%)
     
  • FTSE 100

    5,842.67
    +19.89 (+0.34%)
     
  • Nikkei 225

    23,204.62
    +116.80 (+0.51%)
     

Edited Transcript of GPT.AX earnings conference call or presentation 10-Aug-20 12:00am GMT

Half Year 2020 GPT Group Earnings Call

Sydney, NSW Sep 18, 2020 (Thomson StreetEvents) -- Edited Transcript of GPT Group earnings conference call or presentation Monday, August 10, 2020 at 12:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anastasia Clarke

GPT Group - CFO

* Chris Barnett

GPT Group - Head of Retail

* Matthew Faddy

GPT Group - Head of Office & Logistics

* Robert William Johnston

GPT Group - CEO, MD & Director

================================================================================

Conference Call Participants

================================================================================

* Adrian Dark

Citigroup Inc., Research Division - Director & Analyst

* Grant McCasker

UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate

* Harsh Agarwal

Deutsche Bank AG, Research Division - Head of Asia Credit Research

* James Druce

CLSA Limited, Research Division - Research Analyst

* Sholto Maconochie

Jefferies LLC, Research Division - Equity Analyst

* Simon Chan

Morgan Stanley, Research Division - VP & Equity Analyst

* Stuart McLean

Macquarie Research - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [1]

--------------------------------------------------------------------------------

Well, good morning, everyone, and thank you for joining us for our interim results presentation. We live in extraordinary times, and I hope that you and your families and friends are all doing okay. We are hosting today's presentation from our offices in Sydney. And as such, I'd like to acknowledge the Gadigal people of the Eora nation, the traditional custodians of this land and pay respects to elders past, present and emerging. It's a very windy day here in Sydney. So if you do hear a little bit of background noise, you'll know what that is.

The agenda for today is outlined on Slide 3. And as usual, we will take questions at the end of the presentation.

Given the unprecedented period that we've been through, though, I thought it was appropriate to initially provide a recap of the first 6 months, as outlined on Slide 4. We commenced the year with good momentum following a very pleasing 2019, in which we made great progress reshaping our portfolio and positioning the business for further growth.

When we commenced 2020, we expected to deliver earnings and distribution growth of 3.5%. Our balance sheet had capacity to fund growth, and we had progressed development opportunities within the pipeline. We also enhanced our liquidity, issuing an attractively priced $300 million medium-term note in February.

In March, the landscape changed rapidly as the world and Australia responded to the COVID-19 pandemic. Physical distancing and mobility restrictions were implemented by government, and people are asked to stay at home unless they needed to travel for specific essential services. The economic impact has been significant, and GPT responded swiftly to these changes.

The health and safety of our people, our customers and the community has been our first priority, and we immediately implemented COVID-19 specific measures across all our assets and workplaces. We also implemented measures to reduce our operating costs and deferred all nonessential capital expenditure.

Planned development projects that had not commenced were also suspended. Unfortunately, this meant we had to rationalize part of our workforce. Furthermore, given the uncertainty, we did withdraw guidance. We engaged extensively with industry and government when the commercial tenancies Code of Conduct was first introduced.

As most of you would know, the code is unprecedented and was subsequently legislated in each of the states and territories. Essentially, the code requires landlords to provide SME tenants that are eligible for the government's JobKeeper program with rent relief proportionate to the reduction in their revenue for a period of up to 6 months. The rent relief is to be provided through both waivers and deferrals, and I'll provide more detail on this in a few moments.

While all our assets remained open during the period, mobility restrictions and health concerns meant that sales and foot traffic dropped dramatically in April and May. In our office buildings, physical occupancy fell to less than 10%. With the lifting of restrictions in June, most stores in our shopping centers reopened and visitations and sales returned to near pre pandemic levels, which was very encouraging. Physical occupancy in our office assets also began to increase. Unfortunately, stage 4 restrictions in Melbourne is a real setback for Victoria and Australia. Most retailers are being forced to close their stores under these new restrictions. And as you know, we have approximately 45% of our retail portfolio located in Metropolitan Melbourne. We are hopeful that these strict restrictions being put in place allows us to reopen again in September with the confidence that the worst is behind us. It will be a challenging period for retailers and for the broader community.

Despite the near-term challenges, we are continuing to progress opportunities to grow our logistics portfolio. But as you would expect, we are being disciplined in our approach. Across each of our sectors, we want to be well positioned for the recovery and emerge from the pandemic with strength and momentum.

Turning now to our interim results on Slide 5. FFO per security was down 23.3% to $0.1255 per security. FFO was impacted by COVID '19, including provisions we have made as well as the dilution from the additional securities post the capital raising in June last year. Direct pandemic-related impacts in terms of rent waivers and provisions represents $0.045 per security. We have declared a distribution of $0.093 per security, and this represents approximately 100% of free cash flow. NTA for the group declined 4.8% to $5.52 as a result of a $711 million reduction in our property asset valuations. These revaluations impacted the 12-month total return for the group and resulted in a statutory loss of $519 million. Anastasia will provide more detail on this in her update shortly.

The COVID impacts has played out quite differently across each of our sectors during the 6 months, as outlined on Slide 6. The major office markets entered the COVID period in good shape with vacancy at all-time low. And while demand had softened, there were still solid inquiry. We anticipate that vacancy would rise in both Sydney and Melbourne as developments completed, but at end, we anticipate that effective rent growth would moderate. This dynamic changed in the second quarter with many tenants putting leasing decisions on hold as well as work from home arrangements being implemented. When restrictions eased in June, physical occupancy improved in Sydney and Brisbane but clearly remains low in Melbourne. Within the office portfolio, rent collection remains strong right throughout the period. In the logistics sector, the pandemic impacts have been quite minimal. Our portfolio occupancy remains high along with rent collection rates. Demand from occupiers remains positive and investment demand continues to be very supportive.

In retail, government restrictions on mobility and physical distancing meant that customer visitation declined in Q2, and many retailers temporarily closed their stores. We help those that were able to continue to trade. We have been put in place COVID-safe plans, and we've prepared our shopping centers to be able to ramp up operations safely when restrictions eased. It was clearly important to provide customers and retailers with the confidence that our shopping centers were safe, and appropriate measures were in place to manage physical distancing requirements. The reopening of most stores in June saw a strong rebound in customer traffic and sales. Rent collections was clearly impacted through the second quarter, given the trading conditions and the impending negotiations in relation to the Code of Conduct.

I'd now like to turn to Slide 7 to provide an update on our tenant negotiations and rent collection. As mentioned previously, the Code of Conduct is primarily designed to provide assistance to SMEs, whose businesses have been significantly impacted by the pandemic and it requires landlords to proportionately share this burden.

We have also engaged with tenants to -- who do not strictly require -- qualify under the code, but his businesses have also been impacted. This is primarily being for retail tenants. There is enormous amount of work involved as each tenant is being dealt with on a case-by-case basis. And accordingly, each deal is bespoke.

As you would expect, rent collection was strong in Q1 across each of the sectors. Retail was a little lower than historical levels. Some tenants were starting to feel the pandemic effects in early March -- as some of them were feeling the effect in early March. In Q2, office and logistics' rent collection was again strong at 94% and 98%, respectively.

Most arrears in the office portfolio related to retail tenants, which account for about 4% of office income. Retail rent collection in Q2 fell to 36%. And for context, during April, we had less than 40% of stores trading. This clearly improved in May and again in June. Pleasingly, rent collection for July has averaged 81% across the portfolio.

Deal progress varies by sector, and we have taken a prudent approach to revenue and FFO recognition for the period. We have included in our results, $51.6 million for tenant rent waivers, reflecting deals done to date and allowances consistent with the Code of Conduct for deals expected to be completed.

We've also made provisions for $35 million for uncollected rent that has not been waived. So to be clear, the allowances we have made for waivers and provisions only relate to billings for the period to June 30. We believe that these allowances are both prudent and appropriate given the current uncertainty.

Turning now to valuations on Slide 8. The effects of COVID-19 has also been felt on asset valuations with independent values making allowances for both near-term impact of restrictions and the longer-term impact on the broader economy. Independent values were haven't -- we undertake -- independent valuations were undertaken for 99% of our property portfolio as of June 30. I note that our retail assets were all independently valued in May and again in June.

For our office assets, valuers factored in our rental voids, specific to COVID-19, that represents 0.2% of asset values. While market rents -- face rents remain unchanged, average incentives increased 400 basis points. Downtime has been increased, and average market rent growth has been lowered 40 basis points over the forward 10 years. This has resulted in a decline of 1.7% in the value of the office portfolio.

For logistics, both cap rates and discount rates are firmed, reflecting strong investment appetite for the sector. Market rents and rental growth assumptions were largely unchanged, and this has resulted in a 2.3% increase in the fair value of our logistics portfolio.

For retail, as you would expect, the independent valuers have made significant allowances for rental voids during COVID-19, and they've also increased incentives by 600 basis points. They've also added downtime, additional downtime of more than 2 months. Market rents and forecast rent growth have also been lowered. There's been a greater emphasis on the DCF approach to valuations, along with a softening of cap rates by 15 basis points. So in combination, these changes have resulted in a 10.5% reduction in the fair value of our retail portfolio. There is clearly much discussion as to where valuations head from here, and this is hard to predict given the uncertainty. What we do know though is that, firstly, there is still investment capital looking to be deployed, but waiting for some level of price discovery post pandemic. Secondly, the spread between discount rates and 10-year bonds is currently about 100 basis points above the long-term average. And finally, interest rates will remain low for an extended period, which will provide support to asset valuations. I expect there will also be a flight to quality, leading to a widening of the spread in yields between prime and secondary assets.

As you know, we have a high-quality portfolio, and we expect that our assets will prove resilient through the cycle despite some near-term volatility.

I'll now hand over to Anastasia to take you through the financial results.

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [2]

--------------------------------------------------------------------------------

Thank you, Bob. Good morning. Today, I'm presenting the financial results for the group for the 6 months to 30 June 2020. Funds from operations is $244.5 million, a decrease of 17.4% on the prior comparable period. This was predominantly driven by the impacts of COVID-19, particularly in retail. However, pleasingly, partially offset by the growth achieved in logistics.

Our statutory loss of $519.1 million for the 6 months is driven by devaluations of $711.3 million, once again, most significant in our retail portfolio. Mark-to-market losses were $51.5 million and are in line with market interest rates reducing by approximately 75 basis points over the period.

Operating cash flow is down 25% to $204.1 million. We have revised our distribution policy to be based on free cash flow. In addition, we have shifted the timing of the declaration of the distribution to our results announcement date. There has been no change in the timing of the distribution payment date. Free cash flow is $182 million and like AFFO, deducts maintenance and leasing CapEx.

The revised distribution policy is a permanent change, and cash collected in the 6 months to 30 June underpins the distribution payment due at the end of August. The distribution declared today is $0.093 per security representing a payout ratio of 99.6%, a reduction on the prior period of 29.1% and is within our payout policy range of 95% to 105% of free cash flow.

Turning to the segment result. Our earnings results was significantly impacted by COVID-19 allowances for estimated rental waivers and debtor provisions. In retail, revenue is down 37% due to $75.5 million of COVID-19 allowances, included within the result. The result has also -- was also impacted by lower income from car parks, turnover rent and property management fees, although it was partially offset by property cost savings of 13%.

COVID-19 has also affected the office portfolio with $9.6 million of allowances included within the result. These were more than offset by growth in the portfolio with the contribution from the acquisition of Darling Park. Increased investment in logistics drove 12.8% income growth due to acquisitions in Sydney and Melbourne and development completions, which are fully leased.

Funds management income grew 6.6% driven by acquisitions and developments in the Office Fund, partially offset by devaluations in the shopping center fund. The result is supported by a reduction in interest rates, resulting in a lower cost of debt of 3.1%, being 70 basis points lower than the prior comparable period. Corporate costs have been reduced substantially with the cancellation of the 2020 bonus schemes, deferment of recruitment, a decrease in discretionary spending and support from JobKeeper. Likewise, maintenance CapEx has been trimmed through delay and reduction in nonessential CapEx other than safety projects that remain a priority.

Turning to capital management. Gearing has increased to a modest level of 25.1%, largely due to devaluations. We are well placed with $1.2 billion of available liquidity to fund the group through to 2023 based on our commitments to developments, CapEx and borrowings due for refinancing in 2022. In February, we issued a $300 million medium-term note in the domestic debt capital markets for a term of 12 years at a low margin of 160 basis points. This lengthened our average debt duration and was most cost-effective, given margins have since increased due to higher uncertainty brought about by COVID-19. Our focus has been and will continue to be on maintaining heightened liquidity during these times, as evidenced by the group extending $1.2 billion of bank loans in the first half. We have been focused on lowering interest costs by locking in the base rate at around 14 basis points over the short term, given this is well below the RBA target rate of 25 basis points. This has resulted in our hedge level being elevated at 95%, and we will average 86% over the next 12 months.

The balance sheet remains strong and resilient, reflected in our credit ratings of A stable with Standard & Poor's and A2 stable with Moody's.

Matthew Faddy will now provide an update on the office and logistics results.

--------------------------------------------------------------------------------

Matthew Faddy, GPT Group - Head of Office & Logistics [3]

--------------------------------------------------------------------------------

Thank you, Anastasia. The GPT office and logistics team have positioned both portfolios well to respond to the pandemic impacts and the evolving needs of our customers.

Firstly, looking at the GPT Office portfolio. Our portfolio is constituted of high-quality, modern assets located in Australia's deepest markets. During the period, we have been focused on 4 key areas: the safety, health and well-being of our occupants; the collection of rent; completing leasing transactions; and progressing our development projects.

Operations net income of $139.4 million has been delivered, up 1.2% on the comparable period. Fixed rental increases and the acquisition of Darling Park have more than offset the COVID-19 related relief. At 30 June, portfolio occupancy was 94.4% with an office WALE of 5.2 years. The portfolio is valued at $6.1 billion, with assets under management totaling $13.1 billion.

Above all else, the safety of the people entering our spaces is paramount. To ensure that our office buildings have remained open, we have implemented a range of measures to support our tenants in returning to the office. From the introduction of physical distancing signage and increased cleaning across the portfolio, to management of common areas and lifts, we are focused on providing COVID-safe spaces for our tenants to return as government restrictions ease.

Across all markets, we've been working with tenants who have experienced financial difficulty due to the pandemic, particularly with retailers in the base of our buildings who provide food and services to our office occupiers.

In the period to 30 June, 38,000 square meters of leases were signed, with a further 21,000 square meters at terms agreed. Since 1st of July, 16,000 square meters of agreements from the first half have now been converted to signed leases. And we have a further 28,000 square meters of terms agreed.

As a result of this activity in July, portfolio occupancy, including Heads of Agreement increases to 95.6%, and 2020-2021 expiry has reduced to 9%. Leasing activity in the third quarter is significantly up on the volumes completed between April and June. This positive momentum has been bolstered by our increased virtual marketing capabilities, showcasing available space without the need for physical inspections.

Market conditions have shifted over the past 6 months with increased rates of vacancy across eastern seaboard markets. This increase is due to softening levels of demand, together with delivery of new supply resulting in backfill vacancy. We have also seen increased levels of sublease vacancy as some tenants look to reduce space. As a result of the changing market conditions, we are seeing incentives increase. However, face rents are being maintained.

We are responding by continuing to closely engage with customers across the portfolio with a focus on securing renewals to minimize downtime and maintain high portfolio occupancy. For vacancy, we are focused on securing incoming customers, capitalizing on asset upgrades completed, proactive management strategies and the attractiveness of prime assets over secondary grade stock. Pleasingly, new job adverts as shown on the bottom right, are starting to increase. At the end of July, seek job ad volumes were sitting at 69% of pre COVID levels across Australia, with Victoria moderating to 50%, while New South Wales and Queensland are at 66% and 83%, respectively.

Our income is derived from a diverse range of industries, and the quality of our customer base is demonstrated through high levels of rent collection in the half with 97% of rent collected. We expect that well managed, high-quality assets will best support customers post COVID-19, and we expect to see a heightened focus on safety, health and well-being.

Over the past 6 years, we have invested in smart technology and building upgrades that provide a point of difference for customers. This includes investments in building services, such as destination controlled lifts, and customer amenities with lobby upgrades and end-of-trip facilities. The chart on the bottom right shows lift movements across a number of our assets across the different markets. Attendance rates in Brisbane are rising most strongly from lows in April. Sydney attendance was increasing in line with Brisbane, however, has reduced over the past few weeks. In Melbourne, we are seeing continued low rates of attendance. With Stage 4 restrictions now in place, we do not expect to see any improvement for at least 6 weeks.

Through our discussions with customers, we are gaining a better understanding of how they are thinking about their future workspace requirements. Customer feedback has supported our view that the physical office is a hub for collaboration and fostering workplace culture. The benefits of a physical presence cannot be fully replicated in a remote environment.

Trends towards densification are also being wound back as physical distancing requires more space per person than most modern fit-outs provide for. With ratios of square meters per person reducing from 1:17 in 2012 to as tight as 1:8 over the past few years, we expect to see higher ratios becoming the new normal. The pandemic has also accelerated tenant's desire for flexibility. While some employees will choose to spend part of their week working from home into the future, they will still expect to have a physical place in the physical office.

Greater Western Sydney is the third largest economy in Australia, and we continue to grow our presence in Parramatta. We remain attracted to the population growth, infrastructure investment and growing critical mass of the business district. During the period, a development site was acquired at George Street through GWOF in the Parramatta CBD. The planning process is underway with an architectural design competition due to commence later this year. With the potential for an office tower of up to 75,000 square meters this opportunity complements the group's underway development at 32 Smith Street. Due for completion in January 2021, 32 Smith Street is 64% committed, including terms agreed with QBE anchoring the project. We are engaging with a number of potential tenants for the remaining space. As you can see in the image on the far right, the building tops out next month and already presents as the highest quality office asset in the Parramatta CBD.

Our development pipeline provides future growth opportunity of over 220,000 square meters and an expected end value exceeding $3.5 billion. We are continuing to progress planning and approval processes for the pipeline, and we are positioning ourselves to execute on these opportunities when market conditions improve.

The GPT office portfolio is well located, constituted of prime assets in Australia's deepest office markets. Over the past 20 years, prime assets have had lower vacancy and higher net absorption than secondary assets. Our portfolio has a diverse customer base and WALE of over 5 years. We have invested in asset upgrades and smart technology and are well positioned to remain attractive to occupiers seeking quality environments. Over the remainder of the year, the GPT office team will continue to focus on the short-term imperatives of safety, rent collection and leasing, combined with positioning our development pipeline for success.

Turning now to logistics. The GPT logistics team have had a successful first half, with the portfolio growing to $2.6 billion, representing 18% of the group investment holdings. Our focus has been on safety, customer engagement and leasing and growing the portfolio through acquisitions and developments. Portfolio occupancy is high, increasing to 99.8%. Operations net income is up 13.7% as a result of positive leasing outcomes and portfolio growth, with 99% of rent collected. Three developments were completed and 2 assets acquired, further expanding the portfolio and logistics customer base. The portfolio has a WALE of 6.9 years, and minimal expiry through to December 2021 of 6%. Investor demand for the logistics sector remains strong from both domestic and international markets, and this has contributed to the valuation uplift of $56 million. We continue to successfully unlock our development pipeline with our Kemps Creek site achieving rezoning in the half and a pipeline of developments underway and planned of approximately $1 billion.

Portfolio occupancy has increased to 99.8% with 118,000 square meters of leases signed during the period, with a further 9,000 square meters at terms agreed. During the half, we have introduced a number of new customers to the logistics portfolio including DHL, who now operate out of 2 GPT facilities in Victoria and Queensland. We have also expanded our existing retail relationship with JB Hi-Fi, who have taken space in our newly completed facility in Brisbane.

Over 70% of our customers are ASX-listed or global entities, demonstrating both the quality of our portfolio and the strength of our management team in partnering with our growing customer base. With 35% of customers engaged in retail and wholesale trade and a further 30% from the transport, postal and warehousing sector, the portfolio is well placed to benefit from emerging trends.

We have agreed a handful of temporary relief arrangements with customers impacted by COVID-19. However, demonstrating the strength of our logistics portfolio, we have collected 99% of rent for the half. COVID-19 has accelerated a number of the trends impacting logistics, with e-commerce growing strongly over the half to now account for approximately 11% of retail trade.

Consumer demand for fast and convenient access to products is driving many occupiers to strategically assess and invest in their supply chain. Investment in infrastructure is increasing with governments keen to stimulate economies, focusing on shovel-ready projects that create jobs, drive investment and cut red tape.

COVID-19 has also shown the downside of just-in-time fulfillment, with unprecedented global demand for some products at the same time as freight capacity being impacted. This may result in some groups holding more inventory locally to provide resilience with the current uncertainty.

The portfolio now totals $2.6 billion, growing by 8% from December 2019. 2 facilities have been acquired in Melbourne for a total of $75 million with Botero Place in Truganina occupied by DHL, and Wirraway Drive in Port Melbourne occupied by Computershare. These acquisitions complement our portfolio with long leases and are in locations targeted in our growth strategy. We continue to see strong investor demand for prime facilities, with valuation uplift of 2.3% and the weighted average capitalization rate for the portfolio firming by 11 basis points to 5.29%.

Three developments have been completed in the period, totaling 40,000 square meters with a combined value of $89 million. At Berrinba in Brisbane, 2 facilities have been delivered, 1 pre committed to DHL on a 10-year term and the adjacent speculative facility leased to JB Hi-Fi and Windoware. At Yennora in Sydney, a 5,000-square meter facility is being delivered, activating surplus land. This facility was pre-leased to Westcon Group for a 5-year term. These projects have delivered an average yield on cost of 6.2% and a development margin of 13%.

In Western Sydney, we have 2 projects underway with an expected end value of $129 million. At Penrith, a 50,000-square meter development is due for completion in the second half and is leased to O-I Glass for a 10-year term. A speculative development is also underway at Glendenning. This project is due for completion in early 2021, and we are seeing a good level of leasing inquiry for the 17,000-square meter facility. Our Sydney land bank at Mamre Road in Kemps Creek also achieved an important milestone, with the land rezoned in June 2020. The precinct is located in close proximity to the M4 and M7 Interchange, the future Western Sydney Airport and the proposed Western Sydney freight intermodal facility. Located adjacent to the well-established industrial precinct of Erskine Park, the project will be attractive to a broad range of logistics occupiers. Our 33-hectare landholding is settling over the next 12 months, having been secured in late 2019. Subject to planning, it is expected to support 160,000 square meters across multiple facilities.

Our development pipeline, inclusive of projects underway has an expected end value on completion of approximately $1 billion. This is spread across the eastern seaboard in key growth corridors. With the first stages of Wembley Business Park and Gateway Logistics Hub already delivered, we look forward to delivering the remaining stages of these projects.

At Boundary Road, we plan to commence build-out of this land following the delivery of the majority of the Gateway Logistics Hub. And finally, at Kemps Creek, we plan to deliver this project in phases from 2022.

The GPT logistics team have grown an enviable logistics portfolio of modern assets with a diverse, high-quality tenant base and long WALE. This will continue to be enhanced as we deliver the development pipeline. To conclude, the Office and Logistics portfolios have continued to deliver through a period of unprecedented global events, and our teams are focused on supporting our customers as they return to more normalized operations.

I will now hand over to Chris Barnett to present the retail results.

--------------------------------------------------------------------------------

Chris Barnett, GPT Group - Head of Retail [4]

--------------------------------------------------------------------------------

Thank you, Matt, and good morning, everyone. I'd now like to take you through the results of the retail portfolio. It has certainly been a challenging period for our retailers, our management team, and no doubt, our customers, as we've all had to navigate through these difficult circumstances. Our primary focus over this period has been creating the safest possible environment for our customers who visit our centers and our retailers who continue to trade. Our portfolio remains well leased with an occupancy of 98%. And despite the reduction in retail sales since mid-March, the sales productivity of our portfolio remains at just under $10,000 per square meter. In terms of our financial results, these have been impacted by the measures put in place by governments, including the Code of Conduct. The reduction in net income is primarily due to revenues at a property level being down 37%, allowing for rental assistance and provisions as we continue to progress discussions with approximately 1,900 affected tenants across the managed portfolio.

I'd now like to provide you with a COVID update. Before I cover off the 30 June results in more detail, I wanted to provide a current update on how our portfolio is placed, both in Victoria and the rest of the country with regard to the impacts of COVID and government restrictions.

Firstly, on the portfolio outside of Victoria. We've continued to see positive momentum with stores now open, sitting at 95% and with customers continuing to return to their pre COVID behaviors. In particular, assets like Charlestown, Casuarina and Sunshine Plaza are all benefiting from an earlier relaxation of restrictions by the government. Retailer discussions regarding rental assistance are progressing, having now completed about 26% of the expected deals across the managed portfolio. Whilst the code of conduct was more specifically referencing SME retailers, we are also engaging with non-SMEs given the extent to which their sales have been impacted across our assets.

On marketing and communications, one of the most pleasing aspects throughout this period has been the high level of collaboration across our industry when discussing operational aspects of our retail assets, ensuring a level of consistency with standards and signage, communications and shared learnings.

Now turning to Victoria. As at 30 June, our Victoria assets were enjoying similar recovery as to rest of the country. Our assets had 90% of their retailers trading, and traffic numbers were trending to 2019 figures. Following the introduction of Phase 3 restrictions in July, this reduced the number of stores opened to 62%, with traffic averaging 73% of our 2019 numbers. The introduction of Phase 4 restrictions last Thursday has limited our opening count to essential retailers only. And for the next 6 weeks, we are expecting that our traffic will be materially impacted.

Given the uncertainty with the resumption of normalized trade in Victoria, we are anticipating a longer period in closing out our discussions with retailers regarding rental assistance. We remain actively engaged with our retailers, and we will work closely with those who are continuing to trade throughout this period.

Now turning to Slide 33, retail sales and traffic. Whilst we had positive sales growth in January and February earlier this year, the graph demonstrates the sales and traffic trends for the 6 months and clearly shows the decline through the peak periods of the restrictions. Importantly, by June, there had been a corresponding recovery across most of our retail categories with more stores reopening and traffic returning.

On center sales for the 12 months to June, our MAT was down 10%. At an asset level, as you would expect, Melbourne Central's location, it has experienced our strongest sales decline, down 18% for the 12 months given the reduction in workers, students and tourists visiting the CBD.

To our other assets, both Highpoint and Charlestown were also impacted by sales declines, and both MATs were down 12.5%. But conversely, Rouse was broadly flat on an MAT basis.

On retail categories, whilst the major department stores experienced a decline in sales, catering to the more essential goods, both Kmart and Big W traded well over the period. Our cinemas have been heavily impacted given the government restrictions and lack of product and their MATs were down almost 33%. Supermarkets not surprisingly traded well for the 12 months, benefiting from the peak periods and substantial growth during March through to May, particularly with the initial panic buying. As a large number of our specialty stores hibernated during April and May, our combined specialty MAT was down 11%. Some retailers have performed well, those providing essentials like fresh food, or goods and demand that have -- given that people are spending more time at home such as Rebel Sport and JB Hi-Fi. Understandably, other retail categories have experienced sales decline given the widespread store closure through the peak restriction periods. Those include travel, dining, fashion and footwear.

If we then look at market share, which is a measure of the percentage of sales that we capture out of our trade areas. Through the period, we saw customers limit their out-of-home travel and reduce visitation to our retail assets. Online retail platforms benefited from this during March through to April. Encouragingly, what we have seen over the recent months is customers are returning to their previous shopping behaviors, and our portfolio is reclaiming the lost sales to online. Market share for both physical stores and online are trending back to similar levels prior to the restrictions.

Now turning to Slide 34, an update on our leasing performance. Given the last few months and the priorities of our retailers being more focused on the operations of their businesses, there has been a reduction in the level of completed leasing deals when compared to previous periods. A testament to the quality of our portfolio, occupancy remains high at 98%. On deals we have completed to 30 June, we continue to deliver structured rent increases with fixed lease terms of 4.5 years.

Whilst holdovers are more elevated when compared to the first 6 months of 2019, this is largely reflective of the unusually slow level of leasing activity given the COVID environment and reducing this will be a strong focus in the second half. We undertook independent valuations for the entire portfolio in June 2020. For the GPT retail portfolio, the revaluation outcomes were in line with our release to the market in early June. Including our equity interest in the GPT Shopping Centre Fund, there was a negative revaluation of 10.5%, with a portfolio now valued at $5.7 billion. The weighted average capitalization rate expanded by 15 basis points and is now at 5.04%.

Now turning to Slide 35. And over the last 6 months, several themes have emerged, including the importance of connection, the value of time and the prioritization of convenience. We've seen some retailers accelerate their omnichannel strategies, and we've had to respond to meet the evolving needs of both our customers and our retailers. GPT's Retail Runner is a digital ordering and contact-free solution that enables customers to purchase from food catering retailers with the option of picking up at store or drive through at centralized pickup points. This initiative is responding to the consumers' changed expectations with the shopping experience that drives convenience across our assets. The analytical data that we collect from customer usage will also provide valuable insights for further development of our convenience strategies. With retail rather commencing at most of our centers in the next few months, our intent is to increase the level of usage of this platform and expand the retail offer in the lead up to Christmas.

Whilst we currently face a level of uncertainty, particularly with the current environment in Victoria, GPT remains well placed, given our quality portfolio of assets with some of these being the most productive in Australia. Our assets are located in some of the highest growth markets, one being Rouse Hill in Sydney's Northwest, in addition to assets like Highpoint in Melbourne Central and Victoria and Sunshine Plaza which is expected to benefit from its location in one of Queensland's strongest growing regions and the additional domestic tourism expected over the near term.

GPT has been active in investing in our portfolio to ensure that our assets retain their appeal and relevance to our customers and remain the front of mind preference for our retailers. This investment allows us to remix to in-demand growth retailers responding to changing customer preferences. This, despite the current market conditions, has meant that our portfolio has retained high occupancy and recaptured market share when consumers were able to reestablish their preferred shopping behaviors.

I'd now like to hand you back to Bob.

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [5]

--------------------------------------------------------------------------------

Thanks, Chris. Our funds business continues to be an important part of the GPT platform, providing further scale, alternate sources of capital and recurring income. The platform has $12.8 billion in assets under management, 70 institutional investors and made a material contribution to earnings in the half. The office fund is well placed for the future with assets under management of $8.9 billion, leverage of less than 15% and a $3 billion development pipeline, which includes the recent acquisition of a site in the Parramatta CBD. Furthermore, new equity of just under $300 million was raised in the half, and the office fund's next liquidity review is not until 2026.

The office fund is on track to have all its assets certified carbon neutral by the end of this year, which is an important milestone for the fund and for the group. Our shopping center fund has assets under management of $3.9 billion, and its performance over the period has been impacted by a fall in asset valuations. As you would expect, the fund has a near-term focus on navigating through the pandemic period and positioning the fund -- the portfolio for the recovery, including the potential for mixed-use developments. The fund has ample liquidity that has taken the prudent step of reducing its distribution payout ratio given low levels of rent collection in the last quarter. No units have traded during the period, and the fund's next liquidity review is in 2027.

Turning now to Slide 38. While we have certainly had a major focus on health and safety and navigating through the pandemic, we've also advanced our plans to achieve carbon neutral status for the entire GPT managed portfolio. We have been targeting to achieve this by 2030. But off the back of the work that we have done with the office fund, we've now brought forward our target to 2024. We believe reducing emissions through the more efficient use of energy represents the most important contribution GPT can make to climate change mitigation. It also makes commercial sense with lower energy and operating costs enhancing our appeal, the appeal of our assets to tenants and assisting them in achieving their own emission reduction targets.

During the period, we also launched our first sustainability report, which you can find on our website, along with our inaugural climate disclosure statement. Both reports demonstrate GPT's commitment to embedding sustainability principles in our day-to-day operations and recognizes the significant role in environmental, social and governance matters, play in our ability to generate stakeholder value over the medium to longer term.

So in conclusion, the last 5 months have been challenging, and there remains a great deal of uncertainty for the balance of this year. Accordingly, we are not providing earnings guidance for the full year today. We are, though, well positioned with a strong balance sheet, $1.2 billion in liquidity, high-quality assets and a proactive management team. While Melbourne is currently going through a tough period, we believe that Melbourne, Sydney and Brisbane will continue to be global cities and will benefit from the trend of urbanization. The pandemic may slow population growth for a period, but the trend will continue longer term.

Over the last 18 months, we've built up a significant development pipeline and have been successfully executing on our strategy to develop modern, high-quality logistics assets for our portfolio. As Matt mentioned, the logistics pipeline has an end value of approximately $1 billion, and our Kemps Creek site has been fast-tracked by government, given the limited land supply and its proximity to key infrastructure nodes.

We will also continue to progress other development opportunities so that projects are shovel-ready when the outlook is more certain. As you heard from Matt and Chris, our teams are actively working through tenant negotiations, and we are clearly focused on leasing not only current vacant space but also upcoming expiries.

Disappointingly, the GPT security price is currently reflecting the expectation of a further correction in retail and offset asset values. We believe retail shopping centers will continue to play an important role particularly in the major conurbations of Sydney and Melbourne for consumers and for retailers. When the restrictions lifted in June, we saw an immediate return to the centers by consumers and sales lifted accordingly. Clearly, there was pent-up demand for the experiences that are only available through physical retailing. Shopping centers will continue to evolve, and the pandemic has no doubt accelerated the change. But it is clear that consumers want both physical as well as online.

And while workplace flexibility, including work from home arrangements, will no doubt increase, the role of the office to collaborate, shape culture and drive innovation will become increasingly important as companies position their businesses for the post pandemic recovery. Our office portfolio has a weighted average lease expiry of just over 5 years and a diversified high-quality tenant base. We remain confident that Sydney and Melbourne will continue to be a location of choice for companies and their employees. We do expect there will be some near-term demand softness, but we are well positioned to navigate through this.

So in summary, GPT is well placed for the current uncertainty with a strong balance sheet, a high-quality diversified portfolio and a very experienced management team. We are focused not only on the immediate pandemic situation. But also on positioning the business for the future. It is clearly a very challenging time for Australia and in particular, Victoria, and we are doing what we can to support our people, our customers and tenants as well as the broader community.

That concludes our presentation. And I will now go to a Q&A session, which will be audio only. I'd now like to hand back to the operator for your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question today comes from Stuart McLean from Macquarie Group.

--------------------------------------------------------------------------------

Stuart McLean, Macquarie Research - Research Analyst [2]

--------------------------------------------------------------------------------

Just a couple of questions. First on guidance. I understand there's earnings guidance, but there's just nothing noted in relation to the distribution. Is there any intention to still pay 95% to 105% of free cash flow in the second half? And depending on the answer there, balance sheet gearing increased 25%. If asset, though, continues to fall, mathematically, gearing continues to rise. Do you still have comfort in paying out 95% to 105% as gearing continues to move higher?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [3]

--------------------------------------------------------------------------------

Well, thank you, Stuart. It's Bob here. You break up a little bit, but I got the -- I understood your question to be. First of all, we're not providing earnings guidance and we haven't provided distribution guidance for the full year. But our policy is to pay out 95% to 105% of free cash flow, and I expect that, that will be the case at the end of the year as well. Clearly, that will be a decision for the Board at the time, but that's what we'd expect that is our revised policy.

In terms of gearing, you mentioned if asset values did decline further, are we comfortable with, I guess, our gearing position. We have a stated policy range of 25% to 35%. And as you can imagine, like all businesses, we've done stress testing, et cetera, across our business, and we're very comfortable with our gearing position, very comfortable around that outlook, and I can't see that influencing the distribution -- any distribution that's paid at the end of the year.

--------------------------------------------------------------------------------

Stuart McLean, Macquarie Research - Research Analyst [4]

--------------------------------------------------------------------------------

Hopefully the line is a bit better now. But my second question is in relation to Page -- or Slide 7. Just looking at the provisions that have been allowed for that $35 million. Just keen to understand the process of profits going forward and just [how conservative] the $35 million provision appears to be. Back of the envelope math, it seems to be you take about [28%] provision across the -- all of retail rent. It seems very conservative that you're just not going to get all of that back. So could you just explain the extent of the provision and likely collection of those deferrals and rents yet to be paid?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [5]

--------------------------------------------------------------------------------

Thanks again for your questions, Stuart, and you did break up quite a bit, but I think I got the gist of the question again. First of all, I think you were sort of making the observation that you think our approach to, I guess, the rent waivers that we've allowed for as well as the provision seems very conservative. Clearly, it's quite an uncertain time out there, and retailers have been through a tough period. What we have done is made what we think to be prudent and taking a conservative approach to that. That doesn't change our contractual position in any way, shape or form. But we have taken what we think is a prudent and a pragmatic approach to allowing for both rent waivers and provisions for the half. But I might ask Anastasia to talk you through a bit more of the detail on that.

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [6]

--------------------------------------------------------------------------------

So Stuart, it clearly is a significant area of judgment for the group to make that we ordinarily wouldn't have to do if it weren't for COVID-19. Essentially under AASB 9, you have to form a view around expected credit loss in the future. Normally, we would use historic run rates, but clearly, we're not in that position. And that future focus is a new part of the standard that came in a few years ago. And we do have to judge based on the evidence we have today on how much we will collect -- book and collect. That is very difficult to do. And what -- where we're at in the Code of Conduct and the implementation is not enough progress on, not necessarily deals complete, but the full processing of those deals. And until those deals go through both signatures of the deed by the tenant and ourselves and then process through the tenant statements to provide the abatements and provide the deed as deferral, we don't actually have evidence of cash collection yet. And that's why we've needed to make the estimates we've made.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

The next question comes from Simon Chan from Morgan Stanley.

--------------------------------------------------------------------------------

Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [8]

--------------------------------------------------------------------------------

My first question is also on Slide 7. Just wondering, so after hearing what Anastasia said just then, can you clarify for us how much, if any, rent deferral was reported in your numbers this time? Or was everything worked through as waivers and provisions?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [9]

--------------------------------------------------------------------------------

Anastasia, can you take that?

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [10]

--------------------------------------------------------------------------------

Yes. Thank you, Bob. In terms of deferrals, what we have assumed is both at 30 June, exact deals done. So when I say deals done, these are agreed terms between ourselves and tenants, but they haven't, as I said, been complete in terms of signatures and processing. But they reflect deferment levels that were specific to those deals. In regard to the balance, the balance is based on the Code of Conduct. So it's that proportionate reduction of turnover that those tenants may have experienced and then 50% abatement and 50% deferment.

Now we don't have any other basis to necessarily form a view other than that. And so only time will tell as to actually where it all falls out.

--------------------------------------------------------------------------------

Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [11]

--------------------------------------------------------------------------------

Sorry, it might just be the fact I'm not particularly smart then. So that $42.8 million of agreed waivers, I can assume there's another 50%, i.e., another $42.8 million of deferral that's attached to that or am I not hearing you right?

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [12]

--------------------------------------------------------------------------------

The $42.8 million is a combination of specific deals done to 30 June, which isn't as high as that 26% to the left. It's just sub 20%. And then 80% based on the code. So I wouldn't necessarily say that's a blanket 50-50, Simon.

--------------------------------------------------------------------------------

Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [13]

--------------------------------------------------------------------------------

Okay. Okay. Cool. Got you. Next off -- next question is on office. Matt spoke about plenty of progress there, especially after 30th of June. I was just wondering if you guys can give us some insights into high level lease metrics, incentives, how the new rents compare to passing, et cetera, just at a high level, if possible?

--------------------------------------------------------------------------------

Matthew Faddy, GPT Group - Head of Office & Logistics [14]

--------------------------------------------------------------------------------

Thanks, Simon. It's Matt here. We have, over the last 4 or 5 months, seen inquiry slow in each of the 3 markets that we're in, not unsurprisingly. But positively, we've been able to see those terms agreed post 1 July in our portfolio, which has brought up the occupancy including Heads of Agreement to over 95%. We -- as far as where we're seeing the inquiry and the negotiations we're undertaking at the moment, we are seeing face rents holding, but we're seeing an increase in incentives. And Bob spoke to in one of his slides, the metrics, which you can see on Slide 8, in office where under leasing, the average incentive in the valuations has increased by 400 basis points. That probably gets you up to around 24%, 25%. We are seeing in Sydney and Melbourne, incentives that are higher than that. A couple of the deals that we're looking at are high 20s at the moment.

--------------------------------------------------------------------------------

Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [15]

--------------------------------------------------------------------------------

Great. Okay. And my final question is on debt. I've noticed that GWSCF has gone the covenant waiver from its lenders. Can you confirm for me that GPT itself is -- don't need any sort of waivers like that and nowhere near any of your covenants, et cetera?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [16]

--------------------------------------------------------------------------------

I confirm that there is no issue from a GPT perspective. And just on GWSCF, what we have done is just taken a preemptive step. Given cash collection was low in the first half, we did take the preemptive step of speaking to the lenders around waiving the ICR testing in December.

--------------------------------------------------------------------------------

Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [17]

--------------------------------------------------------------------------------

Right. And it was just simple as that, right, Bob? Like as in the lenders didn't ask you to undertake an equity raise or anything like that? They were happy to grant the waiver without a catch?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [18]

--------------------------------------------------------------------------------

Yes. The waiver was received. Clearly, they all want a little fee for that, of course, Simon. So there is a fee payable for it. But the waiver is forward testing in December. So it's just given where the cash collection was quite low in the last quarter or the second quarter of this calendar year, and we expect on the back of what we're seeing in Victoria that we'll be impacted again in Victoria for the next few months. Then we expect -- we thought it was appropriate to take that preemptive step of getting the covenant waived for the December -- both the covenant testing waived for December.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

The next question comes from James Druce from CLSA.

--------------------------------------------------------------------------------

James Druce, CLSA Limited, Research Division - Research Analyst [20]

--------------------------------------------------------------------------------

First question, just on cash flow for the second half or free cash flow. Is that going up or down in your view?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [21]

--------------------------------------------------------------------------------

That's a little bit hard for us to give you any color on that at the moment. James, wasn't changed. Sorry, it's a little bit hard to give any guidance on that at the moment, James. What we are seeing though is our office portfolio and logistics portfolio continuing to perform. Clearly, there are a lot of unknowns with the Melbourne situation. That's clearly unfortunate, not only for us as a landlord, but also for all the people of Melbourne, it's very tough and challenging for them down there. So until we get a little bit more line of sight over that, it's a bit hard to give you any guidance on that.

--------------------------------------------------------------------------------

James Druce, CLSA Limited, Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

Okay. Well, maybe just look at rent collection then. I mean it's gone from, what, 67% to 81% in July. Can you give any color on what's happened in August? And what are you -- what sort of rent collection expectations do you have for the next couple of months?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [23]

--------------------------------------------------------------------------------

Look, as I said, it's very hard for us. We don't know what the August numbers are yet. It's a little bit early to tell. There's some that pay at the beginning of the month, some that pay in the middle of the month, et cetera. So it varies across the portfolio. But what I will say, though, as I said, I continue to expect office and logistics will remain strong, but the retail is a little bit more uncertain.

--------------------------------------------------------------------------------

James Druce, CLSA Limited, Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Okay. Maybe just on the retail and negotiations. You're slowly getting to the portfolio at 26%. Can you talk to some of the terms that you've been striking with retailers just in terms of sort of duration or any sort of basic color you can provide on that front? And secondly, do you need to go through this whole round again if the government pushes out the Code of Conduct, the date as sort of being talked about in the press?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [25]

--------------------------------------------------------------------------------

I'll just talk to the government sort of position at the moment. We understand that there are a number of industry bodies pushing for it to be extended. We don't really think there's a need for that. I think we're acting responsibly, working with our customers, we want to see them get through the other side, too, so that we can all come through this collectively together. We don't want to come through it and not have retailers there with us alongside us. But I'm hopeful that there is no extension. I think market forces should be allowed to play out and allow ourselves, the landlords and the tenants work through this together.

But maybe I'll ask Chris to give you a bit of color on some of the deals that he has been doing. So Chris, can I ask you to talk to that?

--------------------------------------------------------------------------------

Chris Barnett, GPT Group - Head of Retail [26]

--------------------------------------------------------------------------------

Yes. Thanks, Bob. And James, in relation to the structure of the deals, I've got to say that the code of conduct has really been the governance on really the way that the industry has behaved, and our deals are structured very much around, especially for the SMEs proportionality of abatement and deferral. What has been quite surprising to us is the lack of appetite in wanting to defer rent. But certainly, for the tenants that closed during the period of April and May, around about a 50% abatement with the standardized terms and then varying amounts of deferral moving forward.

I think there's 2 phases. One was the closed period, April, May. We came out of June as our stores starting to reopen. And now there's sort of a different review as to how we then share proportionately the months of July, August and September, which is the period in which the code governs both New South Wales and Victoria.

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [27]

--------------------------------------------------------------------------------

And clearly, it was -- we needed the retailers back in and operating to have a meaningful discussion with them around the code and how they're trading and how we support them through that. So it's really early days. As Chris and Anastasia mentioned, we're only about 25% through that sort of deal flow. There's a lot more other discussions that are happening, and they're in various phases, but we're only about 25% through at the moment. And clearly, there will be some tenants in Melbourne that will need to look at this again, will want to look at it again. And the code actually does contemplate that if things deteriorate particularly the Victorian code does, that they can come back and speak to us again, so.

--------------------------------------------------------------------------------

James Druce, CLSA Limited, Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

Okay. And just one more, if I may. Just on the office occupancy, I think it was 97.4% in sort of March, dropped down to 94.4%, and your HLAs back up to sort of 95.6%, what's coming on. I mean that's quite a big move over the quarter. Can you just provide some color on what was happening there?

--------------------------------------------------------------------------------

Matthew Faddy, GPT Group - Head of Office & Logistics [29]

--------------------------------------------------------------------------------

It's Matt here. James, that is in relation to Deloitte at 550 Bourke Street. So that's 23,000 square meters they left in over May, June out of 550 Bourke Street. So we knew that was coming. They went to an alternative premises in Melbourne. But we have advanced -- we're in good discussions with 2 occupiers that would speak for about half of that -- a little over half of that space.

--------------------------------------------------------------------------------

James Druce, CLSA Limited, Research Division - Research Analyst [30]

--------------------------------------------------------------------------------

Okay. So that makes up the whole 300 basis points there?

--------------------------------------------------------------------------------

Matthew Faddy, GPT Group - Head of Office & Logistics [31]

--------------------------------------------------------------------------------

Yes, it does. That 23,000 is more than half of the vacancy at 30 June.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

The next question comes from Sholto Maconochie from Jefferies.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [33]

--------------------------------------------------------------------------------

Cool. Office vacancy is clear now. Just on -- switch gears to the retail. The holdovers almost doubled to 9.8%, obviously expected given the environment. Can you give a bit more detail on sort of what sort of tenants they were? And is it just that trying to holdover rather than sign new deals?

--------------------------------------------------------------------------------

Chris Barnett, GPT Group - Head of Retail [34]

--------------------------------------------------------------------------------

Sholto, Chris Barnett here. I can talk about holdovers. They are about 9.8% of base rent, but we've averaged around about 7.6% over the last 3 years. So it's not a dramatic increase. I think the amount of leasing activity and momentum in the last 3 months is really reflective of why that has gone up. I think retailers are more focused on the operations of their business and not really wanting to sit down at the moment and discuss renewal options. But of the 200-odd that we have today, half of them are in the last 6 months, which also probably reflects our deal count being down for the 6 months as well, about 30% on where we were last year. It's across the board. I wouldn't say it's category specific. But it really is to showing that the retailers are focusing on operations as opposed to growth initiatives.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [35]

--------------------------------------------------------------------------------

And on the leasing spread, if that was on new leases, the negative 5.2%. What were renewals, if you can provide that one?

--------------------------------------------------------------------------------

Chris Barnett, GPT Group - Head of Retail [36]

--------------------------------------------------------------------------------

I think there may have been just a bit of discrepancy in the wording. The 5.16% negative leasing spreads are on all leasing deals. So we've done about 173 this year. So that's across the board.

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [37]

--------------------------------------------------------------------------------

Sholto, it's just differentiating between leasing deals and deals that have happened as well -- as apart from...

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [38]

--------------------------------------------------------------------------------

All the deals versus new deals, if you could give us a split?

--------------------------------------------------------------------------------

Chris Barnett, GPT Group - Head of Retail [39]

--------------------------------------------------------------------------------

I don't think we actually have given the split. But we are, at the moment, as we did sort of last year, getting a better spread on new merchants coming in, and our renewals are under a little bit -- under more pressure. But also in leasing spreads because I'm going to say half the deals that we have achieved this year were done in the June quarter. So under -- when the retailers are under a bit of duress, you'd expect that, that spread to be around about that percentage. But I will say that our June leasing spreads were better than our May. July leasing spreads are better than our June, and our August leasing spreads today are better than July. So it seems to be a trend that hopefully we can continue.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [40]

--------------------------------------------------------------------------------

Yes. And then just on the Shopping Centre Fund, you didn't pay distributions in March, it was 0.7 in the June quarter, but there was $6.3 million of income. Was that income just received or a timing issue received later? Or just trying to understand where that income came from?

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [41]

--------------------------------------------------------------------------------

Sholto, Anastasia here. The income is our share of FFO from the Shopping Centre Fund for the 6 months. Cash received, as you say, is very, very low. The fund has made the prudent measure to make sure it's focused on gearing and not having too much elevated gearing at this time. And therefore, it has largely not paid distributions for the half.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [42]

--------------------------------------------------------------------------------

Do you expect them to pay distributions for this quarter, in the third quarter and fourth quarter or that's too early to say?

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [43]

--------------------------------------------------------------------------------

It is too early to say. And I think with what's happened in Melbourne, the fund has 72% of its assets in Melbourne. So it's not something the fund could confidently give an answer on at this stage.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [44]

--------------------------------------------------------------------------------

And then just on the -- we got a pretty good logistics pipeline just to wrap up. Do you have any -- are you looking at any further acquisitions to top -- to supplement the pipeline in the logistics space?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [45]

--------------------------------------------------------------------------------

We're certainly looking at what opportunities do -- are out there. Clearly, there's some sharp pricing as well. So we want to be disciplined in that approach. The good thing is we don't need to buy on market. We have got a logistics development pipeline that we can continue to roll out, but we are testing what's out in the market as well. And if we see good value, we certainly think we've got enough strength in the balance sheet to actually support some of those acquisitions.

--------------------------------------------------------------------------------

Sholto Maconochie, Jefferies LLC, Research Division - Equity Analyst [46]

--------------------------------------------------------------------------------

And just to wrap up on Parramatta. I think the leasing was 64% at the half -- at the full year in February, hasn't really moved. I appreciate COVID's come and interrupted the leasing progress, but is it -- you talk to any potential deals that will maybe have been there to improve that from 64%?

--------------------------------------------------------------------------------

Matthew Faddy, GPT Group - Head of Office & Logistics [47]

--------------------------------------------------------------------------------

Sholto, it's Matt again. The -- we are in discussions with 4 potential occupants, and we have been in discussions with them for a few months. There's no doubt those discussions are slower than you would have expected them to be. But they are still very well engaged, and that would speak for the remainder, the remaining 36% of the available space there. So we are still seeing very good inquiry and interest in 32 Smith and would hope that the second half, we get some more of that away.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

The next question comes from Grant McCasker from UBS.

--------------------------------------------------------------------------------

Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [49]

--------------------------------------------------------------------------------

Just 1 question for me. As a result of the pandemic, have you reassessed I guess, the returns of the portfolio and how do you do sort of -- or do you have any noncore assets that don't meet your expected returns going forward? And then also, have you reevaluated your strategic asset weighting between the 3 asset classes?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [50]

--------------------------------------------------------------------------------

Thanks, Grant, for that question. First of all, in terms of allocation of capital to asset classes, we certainly have been prioritizing investment to the logistics sector as we've been communicating for some time, and that will continue. We are diversified -- we have a diversified portfolio, and I consider that we will continue to have a diversified portfolio.

We haven't really stepped back and said, are there things that we need to change about that at all. In terms of, I guess, any noncore assets, I don't think we've got any that's noncore in the portfolio, to be quite frank. And clearly, we're very focused on getting the assets. Well, putting them in a position that will come out of this, the pandemic, and a great position for the recovery. And so we want to make sure we're well positioned for that. So we haven't really looked at reassessing the weightings. So we're currently -- the market weightings out there we've said is for 40%, 40%, 20%. I'd expect that we'll continue to prioritize that investment -- our available investment capacity to the logistics sector for some time.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

The next question comes from Adrian Dark from Citigroup.

--------------------------------------------------------------------------------

Adrian Dark, Citigroup Inc., Research Division - Director & Analyst [52]

--------------------------------------------------------------------------------

A number of my questions have been addressed already, but I was interested in your take on the medium-term outlook, what can come from the retail portfolio, obviously done sharply in the first half, including valuations across assets yet the valuers are accounting for a mid- to high single-digit income impact being ongoing. Could you make any observations about essentially whether you agree with that being representative for your portfolio, please?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [53]

--------------------------------------------------------------------------------

Look, I think that the valuers have made reasonable assumptions across the portfolio in terms of the valuations. Clearly, our portfolio is a strong portfolio. We think they're in strong locations. And we think that we are -- as a collection of assets, they will continue to perform better than many. We do think there will be flight to quality from retailers as well. So we think we'll be well supported in that regard. But I think the assumptions they've made for the next couple of years are probably reasonable.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

The next question comes from Harsh Agarwal from Deutsche Bank.

--------------------------------------------------------------------------------

Harsh Agarwal, Deutsche Bank AG, Research Division - Head of Asia Credit Research [55]

--------------------------------------------------------------------------------

Two questions from me as well. One was, you've given the improvement in the rent collection in July for the entire portfolio, the number was 81%. Can you give that number for the retail portfolio as well? So it was 36% in the second quarter, where did it stand in July? If you can share that number?

And the second question I had was just going back to the Shopping Centre Fund that you have. With the gearing at about 28%, 29%, higher end of the, I think, 30% target that you have. Again, just to be clear, any equity raising plans in that front, again, because the ratings for that fund have been downgraded by S&P earlier in the year? And given where the gearing is headed and what's happening with Melbourne, I'm just wondering, like is there a desire to protect further rating downgrades for the Shopping Centre Fund?

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [56]

--------------------------------------------------------------------------------

So Anastasia here. The answer to your first question, the July collection rate for the retail portfolio was up at 64% for the month of July. In terms of your second question on the Shopping Centre Fund, Bob did talk earlier about covenant waivers on interest cover for the December 2020 half, which will be tested and reported in February. We've also had a gearing covenant freezing of asset values based on the April 30 valuations for the fund. So that testing will anchor the valuations based on the April 30 portfolio. And there are other waivers around just in terms of terms and conditions around closures of parts of assets, et cetera, not causing a reason for the covenants to be triggered. The credit rating itself is around the rating agencies forming a -- or saying there is a concern as to whether there will be a decline, a sustained decline in income from retail. Now usually, the outlook period that the agency has got for the negative is about 18 months. And usually, about a 1/3 chance of actually the downgrade occurring post 18 months. It will just depend where retail conditions land as to whether there is any sustained income reduction.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

The next question comes from [Ben Huang] from Vanguard Australia.

--------------------------------------------------------------------------------

Unidentified Analyst, [58]

--------------------------------------------------------------------------------

A couple of questions from myself if I could, please. The first one probably for Anastasia. Are GPT accounting for the different forms of rental support in any different way now versus pre COVID?

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [59]

--------------------------------------------------------------------------------

The accounting treatment for the rental waivers, which we've traditionally called abatement is exactly the same pre COVID as now being treated during COVID. It's obviously the only difference being the amount is substantially higher. Does that answer your question?

--------------------------------------------------------------------------------

Unidentified Analyst, [60]

--------------------------------------------------------------------------------

Okay. So just -- so I got it clear. So if it's the deferral, will it go on the balance sheet as a current receivable? And how is that different for a rental -- or how does that differ for a rental waiver?

--------------------------------------------------------------------------------

Anastasia Clarke, GPT Group - CFO [61]

--------------------------------------------------------------------------------

So a rental waiver has been a write-off against debtors. So it's like a refund of rent to the tenant and no longer remains in the debtor balance. A provision against potential loss of collection on the debtors is exactly that. It is an expense, but it is a provision that can reverse depending on ultimate collection. Deferment terms will likely still be in current receivables. However, we certainly will not be pursuing collection of those receivables from those tenants while they're in the deferment period.

--------------------------------------------------------------------------------

Unidentified Analyst, [62]

--------------------------------------------------------------------------------

And the second question. On Slide 8, forward leasing. Does the -- for office and retail, the average incentive increased by 400 basis points and 600 basis points, respectively. What was the absolute number there?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [63]

--------------------------------------------------------------------------------

Sorry, the 400 basis points -- sorry, the increase?

--------------------------------------------------------------------------------

Unidentified Analyst, [64]

--------------------------------------------------------------------------------

Yes. Yes. Increase of 400. What was the absolute number?

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [65]

--------------------------------------------------------------------------------

Just hang on a second.

--------------------------------------------------------------------------------

Matthew Faddy, GPT Group - Head of Office & Logistics [66]

--------------------------------------------------------------------------------

So as the absolute number moves up to just over 24% across the portfolio on an average basis, so effectively gone up from circa 20%, grows to just over 24% gross.

--------------------------------------------------------------------------------

Chris Barnett, GPT Group - Head of Retail [67]

--------------------------------------------------------------------------------

And for retail, it's gone up from about 5% to 11%.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

At this time, we're showing no further questions, I'll hand the conference back to Bob.

--------------------------------------------------------------------------------

Robert William Johnston, GPT Group - CEO, MD & Director [69]

--------------------------------------------------------------------------------

All right. Thank you. If there's no further questions, thank you all for joining us today. We appreciate you taking the time out of your busy schedules. For those of you who may be in Melbourne, we hope you're enduring the lockdown as best you can. So stay safe to everyone. Thank you.