Global Logistic Properties : 1Q FY2017 RESULTS - EARNINGS CALL TRANSCRIPT

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The information contained in this transcript is a textual representation of the conference call/webcast of Global Logistic Properties Limited (the "Company") in relation to the Company's unaudited financial statements for the three months ended 30 June 2016. This transcript may be edited for grammar and while efforts are made to provide an accurate transcription, there may be material errors, omissions or inaccuracies in the reporting of the substance of the conference call/webcast. This transcript may not contain, and you may not rely on this transcript as providing, all material information concerning the condition (financial or other), earnings, business affairs, business prospects, properties or results of operations of the Company or its subsidiaries. Please refer to the Company's unaudited financial statements for a complete report of the Company's financial performance and position. None of the Company or any of their members, directors, officers, employees or affiliates nor any other person accepts any liability (in negligence, or otherwise) whatsoever for any loss howsoever arising (including, without limitation for any claim, proceedings, action, suits, losses, expenses, damages or costs) from any use of this transcript or its contents or otherwise arising in connection therewith.

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Ladies and gentlemen, thank you for holding and welcome to the GLP conference call. (Operator instructions) After the speakers' remarks, there will be a question and answer session. (Operator instructions) I would now like to turn our call over to Ms. Ambika Goel, Senior Vice President of Capital Markets and Investor Relations. Please go ahead.

Welcome to GLP's first quarter FY17 earnings briefing. Thanks everyone for joining us today. Our presentation materials and webcast are both available on our website. Today we will hear from our COO, Steve Schutte, who will provide an overview of our results. Steve will be followed by Heather Xie, our CFO, who will provide an overview of our financials; and finally, Ming Mei, our CEO, will touch on our strategies and outlook.

We will have a Q&A session following our presentation. You may ask questions via our phone or via our webcast online. Please note that all numbers are expressed in US dollars and area is referenced in square meters unless otherwise stated.

Thank you and I will now hand it over to Steve.

Thank you Ambika and good morning everyone. Thank you for joining us today. I'll start with our first quarter highlights on slide 3. Our strategy of growing assets under fund management continues to deliver strong results, coupled with solid core operating performance and strong capital disciplines, targeting development in markets with strong demand and limited supply.

Earnings for the quarter were $203 million, which is 24% lower year-on-year, but due largely to FX and less cap rate compression than last year. In fact, excluding these non-recurring items, Group core earnings were up 7%.

Operationally, we saw same property net operating income up 7.9% in the first quarter and our Group lease ratio stood at 91%, which is in line with our expectations. The team did achieve an overall customer retention rate of 71%, although slower leasing of our development projects in China and Brazil led to a 1% drop in our Group lease ratio. I'll touch on this more shortly.

In our development business, we continue to create value with development profit as a recurring part of GLP's earnings stream. For the quarter, we generated $65 million of development profit, or 32% of our full year guidance of $200 million, which reflects a 30% margin on development completions.

As with our development business, our fund management platform creates a recurring source of income that has grown consistently every year. For the quarter, we generated $42 million in management fees, which is up 17% year-on-year and the magnitude of those fees will only increase as our invested capacity grows.

With that overview, next I'll touch on operations, development, and fund management in more detail.

First, turning to operations on slide 4: leasing demand remains stable globally, with 2.5 million square meters of new and renewal leases signed in the quarter, which is up 17% year-on-year and rent growth on renewal leases up 9.6%, led by the US and China.

In China, leasing volumes have moderated recently and GLP's lease ratio was 86% for the quarter, down from 87% last quarter, due to slower leasing of our development projects. Drilling in a little further, however, while leasing on renewals has slowed, new leasing and customer retention remains stable, with approximately two-thirds of new leases being driven by repeat customers. And activity in our key markets such as Beijing, Shanghai and Shenzhen remains robust, with a 90% lease ratio.

So all told, oversupply is centered in a few cities and although these cities make up a minority of our portfolio, supply in these markets will take approximately 12 months to be absorbed, and in the interim, will weigh on our overall lease ratio in China.

Given the overall leasing environment, strength in our key markets, continuing growth in retail sales and e-commerce and the ongoing urbanization and growth in the middle class, we remain confident in the mid to long-term outlook of China. Looking ahead in China, we expect operating performance to be stable in the near term.

In our Japan and US portfolios, we continue to see robust leasing and rent growth, driven by ongoing strong customer demand and limited supply of modern logistics facilities. In Japan, we continue to see demand from the e-commerce and food industries and leasing was extremely active in the first quarter. We signed 370,000 square meters of space, up 118% year-on-year and our development projects are leasing up rapidly.

GLP Suita, our newest and largest facility in Greater Osaka, is 100% preleased a year ahead of completion to ASKUL, a leading e-commerce company. Looking ahead, we expect absorption of new supply to remain strong, cap rates continue to compress, and we will continue our capital recycling program of selling assets to the J-REIT.

In the US, our leasing volumes remain high and we are seeing incremental demand from third party logistics providers, as well as construction-related customers serving the US housing sector. For the quarter, we saw effective rent growth of 20.7% on renewal leases and same property net operating income was up 7.2%. Looking ahead in the US, we expect market fundamentals to remain very strong, with demand continuing to outpace supply.

In Brazil, our strategy in the current environment has been to focus on customer retention and proactively sign leases ahead of expiration. In the first quarter, we renewed approximately 233,000 square meters of leases, or 10% of the lease portfolio, which extended their lease expiry by 2.5 years. Although effective rents on renewals are down 8%, we continue to see overall rent growth of about 8% on our total portfolio in Brazil.

So in summary, operationally, we are pleased with our portfolio's performance in the US and Japan, remain focused on solidifying strong credit tenants in Brazil, and expect continued softness near-term in our secondary markets in China - yet overall feel the fundamentals in China are solid, supported by strong secular drivers such as e-commerce and organized retail. The mid to long-term outlook for China remains positive, with excess supply in the weaker submarkets expected to be absorbed over the next 12 to 18 months.

Next, I want to discuss our development business on slide 5. Development profit remains a regular and recurring part of GLP's earnings stream. For the quarter, GLP generated $65 million of development profit, which represents a 30% development profit margin on completions. This includes the completion of GLP Atsugi II, a Greater Tokyo facility built at a total investment cost of $153 million. The project was fully pre-leased and it bears repeating that throughout the development cycles, we remain focused on exercising strong capital discipline, with development decisions being driven by customer demand.

Specifically, we like to see a demand pipeline of at least 1.5 times in place before starting any new project. In China, for example, our new development starts were all located in submarkets with an average lease ratio of 87%.

Globally, we started $404 million of developments, that's 20% of our FY17 target and during the same period, we completed $271 million of developments, which is 18% of our FY17 target. We expect to meet our global development targets for FY17 and generate approximately $200 million of development profit for the full year. We've already met 32% of this target and our completion schedule is back-end loaded, so the next two quarters will see more moderate gains before picking up in the fourth quarter.

Finally, I want to touch on fund management on slide 6. Our fee-generating capital base continues to expand steadily, generating higher recurring income for management fees. For the quarter, we recognized $42 million of fees from our invested capital, which is up 17% year-on-year. Of that, $28 million were asset management fees and $14 million were development fees.

As many of you have seen, we have recently completed syndication of our second US portfolio, which demonstrates how GLP is able to leverage our fund management platform for the best possible returns. On that transaction, we were able to achieve a 13% return on equity and with the right fundamentals in place, we remain on the lookout for accretive opportunities in the US.

In Japan, we have announced the sale of our 50% share in Ichikawa Shiohama to GLP J-REIT for a 4.5% cap rate. This transaction crystalized $48 million of development profit for GLP. We have had excellent success recycling capital in Japan through our J-REIT and will continue to do so.

With 65% of GLP's assets managed in funds, as we move even further towards an asset-light model, we expect that this percentage will steadily increase over time. With that, I'll turn it over to Heather.