GPT Group chief executive and managing director Michael Cameron tells Robert Gottliebsen and Stephen Bartholomeusz:
Stephen Bartholomeusz: Michael, thanks for joining us. The kind of market turmoil we’ve had over the last few days, and indeed the last few weeks, usually creates risks and opportunities. When you walked away from Australand you said you had a couple of billion dollars of balance sheet capacity for acquisitions. Given what’s happening, are you more or less inclined to deploy that capacity?
Michael Cameron: Yeah, I think at the moment what we’ve seen within the industry is that given that debt rates are so low, you can borrow very inexpensively, and property in Australia particularly continues to provide very good yields. There’s a tendency to be obsessed with just growing the balance sheet. We’ve measured and rewarded on the shareholder returns that we deliver, so we’re actually very disciplined and very careful. I was quite amused the other day, someone said given our gearing – and currently it's around 18 per cent – does that mean we need to go out and buy some assets to increase our gearing? I found that quite amusing, just the current thought pattern. So to answer your question, we just continue to be very disciplined. We look for good opportunities and if that means not buying assets at the moment then that’s fine by us, as long as we continue to deliver great value for our investors.
SB: There is reportedly an interesting asset on the market at the moment with Commonwealth Bank putting its property management business up for sale. Any interest in that?
MC: Well, we obviously don’t comment on any particular opportunities, but we do focus on anything that’s on strategy and fits in with the general direction that we’re heading in now. And of course if it does provide an opportunity to increase returns to our investors then we’d always have a look at it.
Robert Gottliebsen: Michael, do you think the fall in the Australian dollar will reduce the confidence of overseas investors in Australian property?
MC: It’s interesting. When I talk to offshore investors, particularly those that invest in GPT Group, either into our head stock or into our individual funds, they seem less concerned about where the dollar is, particularly in the US. What they’re really looking for is stability and I think if it’s set or reset at a particular level then that will see a return of confidence for investors. But when it’s moving around, as it has in the last couple of days, that certainly makes them a little nervous. But there still is a good attraction to Australia, a good attraction to property given the level of yields, so I expect we’ll still see a nice, steady flow of money coming to Australia to invest in property – which is a great thing.
RG: Do you think we’re going to reduce property yields given that interest rates are lower, or do you think they’ll stay roughly where they are?
MC: Well one of the things that we obviously watch is the gap between the bond rates and property yields, and traditionally if you look over 20 or 30 years they’ve tended to be on average about the same, and at the moment they’re still on a 150, 200 basis points gap, even with the move over the last couple of days. So it’s difficult to know what will happen in the short term, but I sense that there won’t be a dramatic change in the level of yields that you see at the moment out of property.
SB: Michael, in recent times there’s been a lot of money flowing into Australia in search of a yield differential and I assume that some of that went into the Australian retail investment trust sector. Are you concerned that as those carry trades unwind you’re going to have some pressure on your price?
MC: Well, we certainly saw a steep increase in prices generally across all equities, particularly in the A-REIT sector over the last couple of months and of course in the last few weeks a general correction to reflect that change in sentiment. It’s difficult to sort of predict what will happen. It’s always difficult to predict share prices and where they might end up in the future. I think you’d need look at the fundamentals behind the sector. And I think if you were invested in high quality real estate in quality sectors and the fundamentals are strong, such as unemployment and just growth rates generally, that we should see underlying good strength and good value. But of course as we said the share prices will move quite dramatically and you can see a 3 per cent or 4 per cent change in a share price of a REIT over one day. It’s the same asset, it’s the same management team, the same conditions, so it does show just how fickle the market is from time to time.
SB: At a more fundamental level, the non-resources side of the economy and the retail sector in particular have been under some considerable pressure. Have you seen any signs of stress in your centres?
MC: Again, if I look at the high quality portfolio, the large malls across our retail portfolio, that makes up just over 50 per cent of GPT’s assets. We’ve seen a situation which is almost surprising that the margins generally for the retailers continue to be strong and in fact in some cases continue to increase, which is really pleasing. I think if you looked at smaller centres and maybe strip shopping centres where there are more mums and dads there’s definitely much more pain and we see lots of closures. But over our portfolio we’ve got 3700 tenancies across the shopping centres, we’d have at any point in time around 30 or 40 vacancies that are in transition, and we continue to get about a 4 to 5 per cent increase in rents as fixed structured rents each year. So what we see happening at the moment with the change in the US dollar, obviously for importers that will be a bit tougher, but I see them probably absorbing that impact and not passing it on to consumers given the current state of affairs. Consumer sentiment continues to be very bumpy pre-election and business investment generally is still quite subdued.
RG: Do you notice any major differences in the various markets in retail between the capital cities or between parts of capital cities?
MC: We were always very cautious about the impact of the resources sector, so investing in regions like Perth for instance, you always see a lot more volatility where the highs are higher and the lows are lower. We have really concentrated on Melbourne, Sydney and Brisbane. In Brisbane particularly we’ve seen a bit of impact from some of the reductions in staffing levels within the government and I think within Brisbane something like 30 per cent of people are actually employed in a government related role, so that’s had a big impact.
But generally I think across the board the retailers are embracing change, embracing online retailing, providing the theatre and providing good value and good service. They all seem to be doing quite well. So it’s not really specific to any part of retail where you see the strengths and the weaknesses. It’s really the attitudes and the approaches of the retailers as opposed to a particular area. Services around things like restaurants, food, those sorts of things, will continue to do very well.
SB: Michael, all the bigger retailers say that they’ve been putting pressure on their landlords to reduce rents or contribute more to fit-outs and the like. Have you experienced any of that?
MC: We continue to have very good relationships with the two big department stores and we certainly enjoy having them in many of our tenders, so most of those sorts of leases are nearly 15- to 20-year type leases – very, very long term. So at any point in time there’d be very little discussion about rent levels and much more discussion about how we can work together to achieve a common outcome. Most of the time our interests are very aligned and if they do have a situation where there’s a department store that’s non-performing, then it’s in our interests and in their interests to work together to do something about that, so it’s quite a good relationship.
RG: If you look across your portfolio of properties, is there one or two that you’re particularly excited about and similarly are there one or two that you’re particularly worried about?
MC: Yeah. Well, with any portfolio, you can’t have good without bad. But I think generally the high quality of our portfolio is admired by most and certainly is one of the reasons we attract investors from all around the world and within Australia. If I think of our most recent opening, which was a $300 million dollar development at Highpoint in Melbourne, that’s probably the one that I’m most excited about which performed very well: a brand new David Jones store, over 100 new specialty stores including a new Woolworths, and that’s gone fantastically. It’s a great area down in Melbourne. But across the rest of the portfolio I think we’re really quite happy with the performance and the results that we’ve delivered in the last couple of years reflect that.
RG: For example, at Somerton, you’ve had to have a writedown there. That must be worrying you.
MC: Somerton is part of the industrial portfolio. We’ve seen some adjustments of $10-15 million dollars in past reporting periods and, to be honest, over a portfolio heading towards $9-10 billion dollars of assets or $15 billion dollars including our funds we’ll always see movements in valuations and a movement of that level is not a surprise given some of the volatility of those areas.
RG: Do you think that a lot of Australian industrial property is around the road transport system which is getting clogged? And I just wonder if you think that we’ll swing more to rail in the longer term?
MC: We certainly look to a couple of opportunities within our portfolio which have rail connections, but for us anything that’s focused around a transport hub is going to be very attractive. And probably one of the more interesting areas for us is out at Homebush or Sydney Olympic Park. We are the largest landowners out at Sydney Olympic Park and we’ve just finished a terrific development for the Lion Group, a building out there which has worked quite well.
But we’ve got really an opportunity going forward or a pipeline of activity where we can provide very good product and very good service to our tenants which provides great returns to investors at the same time. It’s really interesting. For us, we look for logistics and business parks or industrial to provide… We’re moving from about 9 per cent at the moment up to about 15 per cent of the portfolio is our target. It has very different characteristics to retail and to office and in fact some of the issues that we talked about, say online retailing, while that may be a headwind for retail in general, it’s probably a great opportunity in the logistics portfolio to leverage off some of the those changes. So, it’s really about being up to date, investing time and money into understanding trends in the future. And logistics will continue to change dramatically, we think, over the next five to 10 years and rail will continue to play a very important part to the success of any logistics portfolio.
RG: So, that’s quite a big change in your portfolio to go from say 9 to 15 per cent in that particular sector like industrial.
RG: You do believe that is the growth area going forward.
MC: It’s an area that we have stated we would like to remix our portfolio. We’ve made great progress in the last 12 months of remixing the portfolio, reducing our exposure from just over 60 per cent retail down to currently about 54 per cent retail and we’re heading towards 50 per cent retail. And offsetting that is a small increase in office and an increase in logistics, as I’ve said, up to 15 per cent. That means probably about $400-$500 million dollars’ worth of logistics assets that we will source either by acquisition or by development. And we’ve demonstrated over the last 12 months that we’ve been able to do that very well.
But again from a timing perspective I’m happy to be very patient and be very disciplined because, you know, there are plenty of things that we could be buying at the moment and from a pricing perspective it’s very easy to win at an auction by just paying more than everybody else, but of course we know the outcome of that from a total returns perspective and we’re a total returns business, which is the most important thing that we focus on. And we’ll be very patient and seize opportunities at the right price in the right areas to grow that portfolio.
RG: So, the property market in some areas looks a bit toppy at present. That’s why you’re a bit reluctant to buy.
MC: Well, I think there’ll always be buyers and we’ve got a significant capacity level, probably over $2 billion at the moment to be able to be out there shopping, so we do get invited into every auction or every opportunity, but we are very, very selective and we certainly aren’t going to be seduced into opportunities that might present very good short term opportunities to increase earnings, but potentially they have some significant risks around them… around future total returns.
SB: Michael, you referred earlier to the quality of your retail portfolio, which I don’t think anyone would dispute and historically it’s been the core of GPT.
SB: And now you’re talking about changing the mix. Can you explain the thinking behind that and why you want to reduce the retailers’ proportion of the portfolio?
MC: Yes. We’re still big believers in retail which is why our target is to be at 50 per cent, so it will represent half of the portfolio, so we’re certainly not getting out of retail; we’re just reweighting. And I think over the last 10 years retail has been a super performer and it’s really outperformed the long term averages and we’ve benefited from that. We expect that retail will probably return to more longer term averages in the future, providing around maybe a 10 per cent total return and logistics and office present a good value, so having a diversified portfolio allows us to dial up or dial down our exposure to particular sectors. So, the fact that we’re moving from 60-odd to around 50 per cent doesn’t represent a major concern around retail; it’s just our view of the future of how to deliver the best returns to our investors.
SB: Is there a strand in that thinking of… that retail does face this online challenge which could have some implications for some types of retailers in your portfolio? Is that part of the thinking?
MC: Well, you need to be careful about generalising because I think when you talk about retail that includes all sorts of retail. And for large shopping malls that are dominant in the trade area – and I think of, as an example, Highpoint again – then the impact of online retailing will probably be significantly less than maybe a smaller centre that’s in a less dominant role. So, it’s really looking at individual retailers and individual centres that will deliver the best results for us. And we’re very active at managing the portfolio, but we’re also very active at managing individual mixes within a shopping centre, and online retailing continues to be one of the factors that we take on board. But will it mean the death of the shopping mall in the future? We certainly don’t think so. Will it mean that there’ll be some changes to the mix within a shopping centre from time to time? Then yes, we will definitely see a continuation, but shopping centres have evolved and adapted for many, many years and we’ve been in this business longer than anybody; we’ve been managing centres for over 40 years, so we do understand the need for change and the need to be very active in the way in that we look at our assets.
SB: So, you actively chip in the mix of tenancies in your centres towards non-discretionary segments?
MC: Well, it depends and again it’s difficult to generalise, but we look very actively. We understand the profitability, the trading experience of each of our retailers within each centre, so well and truly before they get into any difficulty, we can certainly manage and work with the tenant and it may mean either reducing the size of the tenancy or in fact relocating them into another part of the centre or even manage them out of the centre by finding another tenant. And we just find this a much better approach, to work with the tenants to get a good outcome and that keeps the centre fresh, successful and keeps people turning up which means that the returns that we get over the long term continue to be very, very strong. But you do need to focus on all that, all of the time.
RG: To what extent is your rebalancing of portfolio achieved by selling retail properties and to what extent are you doing it via increasing your capital?
MC: It could be a bit of both and, as I said a moment ago, our focus has not been about getting bigger, it’s about being better and providing better returns to our investors. So from time to time if that means reducing the size of the portfolio, then we’ll continue to do those sorts of things. And we saw last week a situation where we were actually buying our own shares back – and if I go back a couple of years, we were probably the first organisation that was really talking about the process of acquiring our own shares at a discount which generated enormous value.
So, it’s really thinking, what’s the best use of our funds at any point of time? Is it reducing debt? Is it buying our own shares back? Is it doing a development? Is it investing into retail? Is it investing into office or logistics? So, from time to time we’ll see as we go along the journey of the remix, we may achieve that by reducing or selling retail assets, we may achieve that by acquiring new assets in office or logistics. Realistically it’s going to be a combination of the two. Last year we did a billion dollars’ worth of transactions and that was a combination of acquisition and a combination of divestments as well, so it’s really been very opportunistic and looking at what’s available at any point in time.
RG: So, you think your share discount to asset backing represents better value than a great deal of properties that you might buy.
MC: Absolutely right.
RG: What is a discount?
MC: At a point in time if our share price is trading at a particular level, we’re able to buy quality real estate and by buying our own shares, without stamp duty, without transaction costs and the liquidity of the stock means that that’s very, very easy to achieve.
RG: What is your discount?
MC: And for us, that’s a much better option than overpaying on an asset opportunity that may exist in the same week.
RG: What is your discount?
MC: To NTA? Our last stated NTA [net tangible assets] was back in December. Well, we only disclose that each six months. It was $3.73 at that stage and that’s around the price that we were purchasing, but we certainly don’t disclose our strategy around buying our own shares. We don’t disclose that to the market for obvious reasons.
RG: Yeah, but your share price is above that now.
MC: That’s right and that’s why we’re not buying our own shares today. (laughter)
SB: Michael, last one for me, on that theme of capital management, we’ve seen Westfield in a fairly structural way and Federation Centres in a slightly more subtle way moving to a kind of a cull investment model to leverage their returns and to recycle capital. Is that something that you’ve considered?
MC: Well, for us, every decision is based around what’s going to generate the best returns for our investors and that is really the core of everything we do. You know, we are a total returns business and it is important to focus on that as the key measure. But we do look at individual assets. We don’t like being a passive owner of an asset – so having a co-owner that has the in a retail situation has the rights over the management and the development of the centre and for us, being a passive investor isn’t ideal. We’d much rather have a situation where we have the ability to manage that centre in the way that we do and also be able to drive developments within that centre to produce a better outcome.
SB: Okay. Michael, thank you very much today for your time. We do appreciate it.
MC: Thanks for the opportunity to talk to you today.