It is mandated to invest in the office, industrial and retail property sectors, and its 55 office and industrial properties are primarily located in growth states on Australia's eastern seaboard.

This portfolio is currently valued at approximately AUD4.5bn and comprises two-thirds office and one-third industrial properties. GOZ is included in the S&P/ASX 200 Index and has a Moody's investment grade rating of Baa2 for domestic senior secured debt. The company is actively looking for opportunities to grow the business, including the acquisition of high-quality properties and entry into fund management.

Just as the Covid-19 pandemic continued to have a profound impact on businesses and individuals around the world in FY21, it also created challenges in GOZ's operating environment, disrupting the way its team worked together and delaying some of its planned initiatives.

However, GOZ entered this period on a solid footing and took action at the beginning of the pandemic to protect its business. This ensured that it was able to meet the challenges head-on and resulted in the pandemic not having a material direct financial impact on the business.

Performance

There was a great deal of uncertainty regarding the longer-term impact of the Covid-19 pandemic at the start of FY21 and as a result GOZ did not initially provide earnings guidance. However, as the year progressed and confidence grew following its leasing success, FFO guidance of AUD25.2c – 25.5c per security was issued in February. This guidance was increased to AUD25.4c – 25.7c per security in April.

GOZ started the year with reduced earnings of AUD10.4m due to Woolworths vacating a sizeable industrial asset during FY20. This loss was, however, offset by increased income from the distribution centre in Gepps Cross, following the completion of a significant expansion in partnership with Woolworths. GOZ also began collecting revenue from Botanicca 3, its new A-grade office building in Richmond, Victoria, which has been progressively leased over FY21 and is expected to be fully occupied by the end of the calendar year.

The Board provided FY21 distribution guidance of AUD20.0c per security, and although GOZ's financial performance exceeded initial expectations, the Board thought it prudent to maintain a lower pay-out of between 75% and 85%, with the expectation that leasing incentives will remain elevated in the near term. Maintaining a more conservative pay-out ratio will assist the Board in providing shareholders with growing distributions in the future.

In February, GOZ initiated an on-market buy-back programme for up to 2.5% of its issued capital in response to market volatility and this remains in place. At the time, its security price was trading at a significant discount to net tangible assets (NTA), despite the business continuing to deliver a strong performance with no significant direct financial impact from the Covid-19 pandemic and substantial valuation gains across both the office and industrial sections of the portfolio.

As of 30 June 2021, GOZ had purchased 416 643 securities (0.05% of issued capital) at an average price of AUD3.27.

GOZ's security price has significantly appreciated over the second half of the financial year and it has made up the majority of the ground lost at the onset of the pandemic. This drove the substantial increase in total securityholder return over the year and once again, it outperformed the ASX/S&P 200 REIT Accumulation Index. GOZ has now outperformed the index over the past one, three, five and 10-year periods.

Portfolio highlights

To ensure its portfolio is aligned with its overall strategy, GOZ regularly reviews its assets. During FY21, three assets were identified for disposal and successfully sold.

Opting not to pursue a lengthy development project in an uncertain operating environment, it sold a vacant industrial property at 120 Northcorp Boulevard, Broadmeadows, Victoria, early in FY21. The cost of holding this non-income producing asset was factored into this decision.

In May 2021, GOZ also announced the sale of its leasehold interest in Quad 2 and Quad 3, Sydney Olympic Park, New South Wales, as these properties no longer fitted in with its portfolio of defensive assets. The weighted average lease expiry (WALE) of these assets was approximately 1.6 years as of March 2021, significantly below GOZ's office portfolio's WALE. In addition, around 17% of its tenants were based at the Quads, despite these assets representing only 1.5% of the portfolio by value which was very management-intense.

Even though GOZ divested from the Quads, it remained confident in the long-term outlook for Sydney Olympic Park and was able to re-invest the sale proceeds relatively quickly into a nearby A-grade, modern office asset. The new property, situated at 11 Murray Rose Avenue, is fully leased to high-quality tenants with an average 4.8-year WALE as of 30 June 2021.

During FY21, the portfolio's occupancy increased to 97% and GOZ maintained its long average WALE of 6.2 years due to substantial leasing success. Most notably, in October a 10-year and seven-month lease was signed with Bunnings for 71% of Botanicca 3. The lease was executed in the middle of Melbourne's extended Covid-19 lockdown and was one of the most significant office leasing transactions in FY21. Upon commencement of the lease, Bunnings became one of GOZ's top 10 largest tenants by income.

Several long leases were also signed with other key tenants, including Monash University, the South Australian Government, Australia Post and Autosports Group. The business did not experience any significant changes to tenants' space requirements for lease renewals and tenants continued to seek long leases, with the average lease term being 8.2 years.

Driven by its leasing success and proactive asset management over a number of years, the value of the GOZ's portfolio over FY21 on a like-for-like basis increased by 10.2%, or AUD417m. This was the largest 12-month like-for-like increase in its history.

ESG

GOZ is committed to sustainable operations and reducing its environmental footprint. During FY21, it significantly accelerated its efforts to achieve net-zero carbon emission across its operationally controlled office assets and corporate activities. It is now aiming to achieve this by 2025 – or 25 years sooner than its initial target, which was set in 2017 to align with the Paris Agreement.

Reducing energy usage, meeting energy needs with carbon-free energy, and offsetting residual emissions with high-quality carbon offsets are the three key focus areas for the business. The net zero target will be achieved through energy efficiency measures and onsite solar installations, as well as investment in offsite renewable energy for its residual energy needs. In addition, high-quality carbon offsets will be used for emissions it cannot avoid or reduce, such as natural gas use and emissions from corporate activities.

To further align with the recommendations made by the TCFD, GOZ made significant progress in its sustainability reporting. This includes publishing the results of a high-level scenario analysis that considers the likely impact of an increase in global temperature on its portfolio (physical risks) and stress-tests its resilience to a rapid transition to a low-carbon economy (transition risks). Pleasingly, the analysis did not identify any material downside financial risk in either scenario. The research found that by focusing on building a resilient portfolio with strong green credentials, GOZ was in a solid position to respond to the potential physical and transitional impacts of climate change in the medium and long term.

Overall, the business has continued to do well in external ESG benchmarks. Its global real estate sustainability benchmark (GRESB) score increased 3% to 74/100, which was 6% higher than the GRESB average score.

It also maintained an above-average Carbon Disclosure Project (CDP) score of B. In addition, the average NABERS energy rating across GOZ's modern, efficient portfolio is 5.1 stars.

GOZ's community engagement focused on charitable drives and donations in collaboration with its tenant communities. For example, the business participated in the "Dignity Drive", an initiative run by Share the Dignity and supported by major tenants Bunnings and Woolworths.

During FY21, it also continued its support of the Property Industry Foundation (PIF), which works closely with the property and construction industries to provide housing for homeless youth. GOZ supports PIF with an annual donation. Additionally, GOZ became a sponsor of Healthy Heads in Trucks and Sheds (HHTS). The foundation, which is focused on mental health and wellbeing for workers in the road transport and logistics industries, is supported by key GOZ tenants Linfox, Woolworths, Australia Post and Toll.

Recognising that its people are integral to its success, GOZ supported all permanent employees through this challenging period by not reducing working hours or fixed remuneration. While the Covid-19 pandemic continued to affect the ability of staff to collaborate as a team in its Melbourne head office, the business ensured that its people stayed connected and motivated while working from home for an extended period. Regular virtual social events were organised, with additional sessions focusing on mental health and building resilience.

GOZ also mandated an external provider to undertake its annual employee survey, and its engagement and alignment scores were in line with FY20. Furthermore, it maintained its position in the top quartile of its benchmark group. This was considered an excellent result, considering that not all companies within its benchmark group faced the same extended work-from-home government directives that GOZ did.

Prospects

The position for GOZ remains promising. The business has successfully navigated the challenges presented by the Covid-19 pandemic and it is firmly focused on the future.

As we look ahead, the future of our operating environment and the broader Australian economy is less clear when compared with just a few months ago, as many parts of Australia are now under lockdown due to the threat of the Delta-variant of Covid-19.

Industrial property, which makes up a third of GOZ's portfolio, has continued its global popularity. Demand for well-located industrial assets continues to grow, fuelled by increasing online shopping and changing consumer expectations with regard to delivery times. These trends are expected to support ongoing investor appetite for this sector. While GOZ's portfolio has benefited from this strong demand, it is making it difficult to acquire additional properties for the portfolio.

While retail is part of GOZ's mandate, it does not have any retail assets. Two-thirds of GOZ's portfolio comprises office buildings. Most of these properties are in suburban locations and are expected to perform reasonably well relative to the market overall. The vast majority of its office tenants have returned to working in their offices regularly. While it is too early to say there is a definite trend of organisations adopting a hub and spoke model, there are some encouraging signs. There is also a strong demand for GOZ's metropolitan offices from both existing and potential tenants.

GOZ's gearing and pay-out ratio are at record lows. This places it in a solid position to pursue growth opportunities, including acquiring high-quality properties and entering funds management.

Top 10 GOZ tenants by gross rental contribution as at 30 June 2021